Today the central bank in the Netherlands, which is also the pensions regulator, announced a change to the method of discounting used by pensions funds across the country.
By revising down the so-called Ultimate Forward Rate, they have increased the assumed present value of liabilities: a move which is designed to ensure that
the interests of pension scheme members must be put first
For those interested, you can read the bulletin here.
Is this all just “double Dutch”, or does it have deeper consequences? There are a couple of important takeaways.
First, the Dutch have shown that even a well-established regulatory regime can be subject to significant regime change. It is dangerous to assume that regulations are set in stone. Those interested in the potential for similarly disruptive regime change in the UK should look at a recent article published by John Roe and Tim Dougall at LGIM.
Second, the move highlights the difficulties of insurance and pensions funds across the Eurozone in the current low interest rate environment. The Dutch have now moved to a “more realistic actuarial interest rate”, but it is still substantially higher than interest rates prevailing in the market today. The European pension and insurance sectors are sitting on a significant asset-liability mismatch (see the IMF’s Global Financial Stability Report for April*) which creates a persistent incentive to reach for yield.