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Royal Dutch Shell pumped in €2 billion in rescue payments to its Dutch pension fund

THE WALL STREET JOURNAL

Recovery, Then Reform, for Dutch Pension Funds

By MARK COBLEY

Europe’s second-biggest pensions-savings market is on course for recovery.

Many retirement funds in the Netherlands returned to full solvency this summer, but the country’s politicians, who fear that the global market crisis exposed weaknesses, are mulling options for reform.

The average Dutch pension plan was 107% funded at the end of August, according to estimates from the consultancy Hewitt Associates — two percentage points above the 105% level insisted upon by the country’s central bank, the DNB, which regulates the retirement sector.

That is a boost for the €550 billion ($784.96 billion) industry, which until last year’s woes had a reputation as one of the safest and best-funded in Europe. The U.K., for instance, which has the largest pool of private retirement savings in Europe, has struggled to deal with funding levels that are far below the pool’s total liabilities. The country’s Pension Protection Fund, which serves as a safety net for pension plans, estimates that the 7,400 largest pension plans in the country had a collective deficit of £158.1 billion ($257.36 billion) at the end of June, up from a deficit of £18.8 billion in July 2008.

Unlike U.K. pension funds, Dutch pension plans are able to cut benefits in bad years.

The Dutch pension programs have been helped to recovery both by rising stock markets — the MSCI World index rose 13% from the start of July to the end of August — and rising interest rates, which under a key accounting rule make liabilities look smaller. Hewitt said that the average funding level remained stable at 107% between the two months, because interest rates fell lightly in August, offsetting the boost from investments.

In early December, the average funding level for Dutch pension plans fell to 95%. When stock markets fell in March to their lowest point in years, the average funding level dropped just below 90%, according to Hewitt.

The recovery in markets has helped the pension fund for Dutch state and educational workers, known as ABP and the largest pension fund in Europe created solely to pay retirement benefits. ABP’s funding level fell from 132% at the end of June 2008 to 90% at the end of last year.

In March, ABP lodged a recovery plan with the country’s central bank, in compliance with Dutch rules. The plan, to be implemented in stages, aimed to reduce risk in the investment portfolio and temporarily increase members’ contributions by 3%.

As part of the recovery plan, the pension plan said it would reduce its bond holdings overall and cut investments in government debt, because they weren’t providing returns comparable with corporate debt.

At the end of June, ABP was 98% funded, well head if the 93% it had targeted for that time, after earning a 4.5% return on investments in the first six months of the year and seeing a reduction in its liabilities. Even so, ABP’s bosses warned that the road to its goal of 135% funding wouldn’t be an easy one, because of continued market volatility.

But the clement market conditions haven’t been enough for some trouble-hit funds. Oil giant Royal Dutch Shell pumped in €2 billion in rescue payments to its Dutch pension fund during the second quarter as it recovered to the 105% minimum funding level on June 30.

In a statement published at its website, Shell’s pension plan board told its members: “Even for a large concern as Shell these are enormous sums of money. By way of comparison: €2 billion equals more than twice the fixed annual salaries, or the pension contribution basis, of the participants in the pension scheme.”

The Shell fund isn’t alone in having needed help at a time when Dutch companies are reeling from high pensions costs, Hewitt said. The country’s Labor Foundation, or Stichting van de Arbeid — a consultative forum run by the three principal employers’ associations and the three main trade unions — is holding talks from mid-August to examine the “sustainability of the Dutch pensions system”.

The country’s politicians also are rethinking pensions. Piet Hein Donner, minister for social affairs and employment, at the end of July appointed a series of academics and pensions experts to two committees that are studying ways to ‘future-proof’ pensions against any further crises and the generally ageing population. They will report back by January.

Mr. Donner also is looking into the discount rate is used to calculate the health of a pension plan. Pension plans now calculate the value of their future liabilities by using the yield on interest-rate swaps. Disruptions in this market last December were a key reason that solvency levels appeared so poor. Some commentators, such as consultant Anton van Nunen and the academic Piet Duffhues, want this changed.

“The rate of safe government bonds is still higher than the yield curve that the funds must use,” said Hewitt. “The difference even slightly widened further in August. When using this alternative interest rate, the average funding level is a further five percentage points higher.”

As well as political reform, those in the industry know they have to contend with continued market volatility. Pensioenfonds Zorg & Welzijn, the country’s second-largest pension plan, recovered to 103% as of the end of July but it warned its members: “The erratic coverage can move. A variation of several percentage points from one day to another can occur. This state of 103% in late July is a ‘snapshot.”‘

Write to Mark Cobley at [email protected]

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