The average funding ratio for Dutch pension funds increased from 114 per cent to 120 per cent in March, the highest level in more than 10 years, according to analysis from Aon.

The provider's Pension Thermometer revealed that equities and commodities had also risen sharply over the past month, despite global tensions and uncertainty, which compensated for the decline in fixed income portfolios.

In addition to this, Aon flagged that interest rates rose sharply in March, with 30-year yields reaching 1 per cent, whilst liabilities fell by more than 5 per cent on average.

Major reforms to the Dutch pension system have recently been put forward in the Future Pensions Act, although Aon noted that these changes may seem less urgent in light of the improvements in policy funding ratios.

Despite this, the firm stated that it was "sensible" to maintain momentum and switch to the new system, warning that the current positioning is a snapshot amid "very volatile" markets and great uncertainties around global developments.

"The new system makes pensions more personal and transparent," Aon wealth CEO, Frank Driessen, explained.

"In addition, unnecessary buffers are no longer maintained that do not benefit the participants. With a policy funding ratio of 112 per cent, only a small amount can be indexed, barely 15 per cent of price inflation.

"With the current high inflation, that is even a much smaller piece. It is precisely in the new system that a much larger increase could be granted.”

Aon noted that there were growing concerns about the rise in inflation, which reached 11.9 per cent in March, with particular concerns raised over the extent to which the new system can absorb inflation risks.

“We see more opportunities within the new system to hedge the inflation risk,” Driessen explained.

“Where in the current system the holding of inflation-protective products is punished more, in the new system a certain degree of inflation protection can be applied.”

However, whilst the firm noted that there was room for pension schemes to be able to index earlier under the General Administrative Orders, it queried to what extent schemes will make use of this, particularly in light of the increased funding ratios.

Aon also highlighted the past month as evidence of the volatility in funding ratios, warning that one negative month can nullify the recovery of the funding ratio and negatively impact indexation options.

“These are turbulent times and it remains exciting for pension funds how developments translate into the funding ratio,” added Driessen.

“We wish pension funds a lot of wisdom in the difficult considerations they currently have to make, such as whether or not to proceed with indexation sooner.”

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