The average funding ratio of Dutch pension funds increased to 135 per cent in August, up from 134 per cent in July, as higher interest rates reduced the value of pension liabilities, according to Aon Netherlands.

Its Pensions Thermometer also showed that the indicative policy funding ratio, which is based on the average funding ratio over the previous 12 months, remained unchanged at 129 per cent.

During the month, the risk-free interest rate over the first 30 years rose by an average of 11 basis points, while the Ultimate Forward Rate (UFR), used by pension funds to value future liabilities, stood at 2.1 per cent.

As a result of rising interest rates, the value of pension liabilities fell by almost 2 per cent.

However, investment returns were slightly negative overall, with equities rising by 2.1 per cent in August, including a 2.1 per cent gain in developed-market equities and a 2.4 per cent increase in emerging-market equities.

The fixed-income portfolio fell by 1.8 per cent as interest rates increased, leaving the total portfolio return at -0.3 per cent.

Aon noted that market conditions during the month remained influenced by geopolitical tensions in the Middle East, higher oil prices and uncertainty around the outlook for inflation and interest rates.

Despite this, Aon Netherlands wealth director, Frank Driessen, said the financial position of pension funds preparing to move into the new Dutch pension system appeared increasingly robust.

“At the beginning of this year, there were still concerns about whether the funds that had not yet transitioned would have a strong financial position," he continued.

“To date, there seems to be no cloud on the horizon in that regard.”

He noted that many funds had also introduced protection structures to preserve their financial position ahead of the transfer.

“It is good if the funds that are yet to transfer also have something to distribute. That would ensure a robust start in the new system,” he added.

However, Aon also highlighted concerns around compensation for members affected by the abolition of the average premium system, particularly where workers change jobs during the transition period.

Under the new system, contributions will flow directly into individual pension capital rather than being redistributed between younger and older members.

Aon said compensation was therefore being introduced for members part-way through their careers who could otherwise be disadvantaged by the change.

However, where compensation is paid as a lump sum during transition, employees who change jobs before their current pension fund has transitioned could miss out if they move to an arrangement that has already completed the change.

“It is of great importance to pay attention to this, because serious money is at stake,” Driessen stressed.

Aon also raised concerns about insured pension arrangements in which employers retain an existing contribution structure for current employees while introducing flat-rate contributions for new employees.

Driessen described this as potentially creating “golden chains”, as employees may need to remain with their existing employer to maintain the same pension accrual or negotiate compensation when moving jobs.

He warned that arranging such compensation could prove difficult, particularly in light of pay transparency requirements.

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