The indicative average funding ratio of Dutch defined benefit pension funds fell to 123 per cent in March, according to Aon, impacted by the conflict between the United States, Israel and Iran.

Despite this, the policy funding ratio, which is the average of the funding ratio over the past 12 months, remained stable at 125 per cent in March, Aon’s Pension Thermometer found.

Aon said the escalation of conflict between the countries, including targeted attacks on oil and gas infrastructure and effective disruption of the Strait of Hormuz, has sharply driven up energy prices, and supply risks remain substantial.

In addition to oil and gas, Aon said fertilisers and industrial gases have also been affected, increasing the risk of later pressure on food prices and certain industrial supply chains, such as semiconductors.

Aon explained that the energy and commodities shock has translated into broader market stress. Global equity markets have fallen by more than 7 per cent since the start of the conflict, and credit spreads have widened.

In addition, bond markets saw yields rise sharply due to increasing inflation expectations: the German 10-year yield stands at around 3.1 per cent, well above pre-conflict levels. As a result, investors are increasingly pricing in prolonged disruption rather than a quick normalisation.

By country, Aon pointed to China and India as being particularly vulnerable due to their dependence on Gulf oil and limited strategic reserves (outside China). In March, emerging market equities fell by -10.9 per cent, a steeper decline than developed markets, which lost -5 per cent.

In the eurozone, rising inflation expectations pushed interest rates higher, causing fixed income portfolios to fall by 3.8 per cent. Corporate bonds returned -2.3 per cent due to widening risk premiums. In total, the pension portfolio return was negative at -4.8 per cent.

In March, the risk-free interest rate for the first 30 years rose by an average of 27 basis points, while longer maturities saw a decline. The Ultimate Forward Rate (UFR), used by pension funds to value future liabilities, stood at 1.8 per cent. Aon said the increase in interest rates reduced liabilities by approximately 1.4 per cent.

Furthermore, returns for defined contribution schemes ranged on average between -2.8 per cent and -4.7 per cent across all age cohorts.

All participants recorded negative returns. For older participants (around age 55 and above) opting for variable drawdown, returns were slightly more negative than for those choosing a fixed benefit.

For participants close to retirement aiming to purchase a fixed annuity, portfolios fell by an average of 2.8 per cent, while the cost of pensions declined by 2.6 per cent. However, Aon stressed that the market volatility in March is only expected to have a limited negative impact overall.

With the current volatility, Aon said that schemes still left to transition are faced with the question of what they should do to protect funding ratios.
Some large pension funds have hedged against equity market declines of more than 20 per cent, while others have chosen not to.

“Each fund must weigh this decision carefully,” Aon Netherlands director of wealth, Frank Driessen, said.

“It is a complex issue, but the sector has gained considerable experience. Ultimately, boards must assess whether such measures are balanced, taking into account costs, participant composition and the fund’s financial position,” he added.

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