The average funding ratio of Dutch pension funds dropped to 110 per cent in January, in what has been described as a ‘difficult’ start for pension funds.

However, Aon’s monthly Pension Thermometer also revealed that the indicative policy funding ratio, based on the average funding ratio over the past 12 months, rose to 109 per cent in January.

Aon said that sentiment completely reversed in January compared to December 2021. On the one hand, there was good news about economic growth in the US, 6.9 per cent year-on-year in the fourth quarter, and also from companies that reported good results for the fourth quarter.

On the other hand, there was increased uncertainty due to rising inflation, which not only has an impact on the cost price of products but also on the disposable income of the consumer. The US Central Bank (Fed) also hinted that inflation could last a little longer, that it will end its bond-buying programme in March and that it will raise interest rates. This made investors nervous and U.S. Treasury yields hit their two-year highs as investors expect four rate hikes in 2022.

Moreover, tensions between Ukraine and Russia escalated further, after Russian President Vladimir Putin rejected the U.S.'s written response to Moscow's security requirements. Meanwhile, the U.S. and NATO countries are moving troops to Central and Eastern Europe to counter the military buildup of Russia on the border.

All in all, this was not a good basis for risky investments, causing global equities to fall by almost 4 per cent, developed market equities to fall by 4.5 per cent and emerging markets to limit the damage to 0.5 per cent. Listed real estate decreased by about 4 per cent.

Only commodities managed to benefit from rising commodity prices with a 13 per cent return. Rising interest rates had a negative effect on all fixed income value categories. These fell by almost 2 per cent: corporate bonds and high yield were 2 per cent lower and emerging market debt even 3 per cent.

In regards to interest rates, these remained virtually unchanged in January. On balance, the risk-free interest rate over the first forty years rose by an average of 8 basis points in one month. Due to the decrease in the Ultimate Forward Rate (UFR), with which pension funds calculate the value of their future liabilities, to 1.4 per cent, liabilities increased. On balance, liabilities increased by 0.3 per cent.

"One disappointing month and the figures look a lot different," Aon Wealth Solutions CEO, Frank Driessen, said. "This shows the high dependence of the funding ratio on market developments." However, he noted that equity risk is also necessary to make sufficient returns.

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