Funding ratio and policy funding ratio of pension funds in the Netherlands 2022-20223
From December 2022 to December 2023, the funding ratio of pension funds in the Netherlands was quite volatile, experiencing several peaks, the largest of which was in September 2023 before declining by roughly 10 percent, to rest at 114.6 as of December 2023. The policy funding rate was comparatively less volatile, having decreased by roughly two percent in the period.
Pension savings in the Netherlands are tied to the financial markets
In terms of worth, the Dutch pension system is the second largest of Europe. In 2023, the pension system in the Netherlands had nearly 3.37 trillion euros worth of assets under management (AUM). Pension participation is mandatory, with part of one’s salary being transferred to a pension fund every month. Funds then use these payments to invest on the financial markets. Government bonds are a popular pick, as these are relatively safe investments. This results in two things, however. First, if the financial markets are hit by unrest (for example, due to the coronavirus or geopolitical events like the Brexit in 2019) pension funds will be affected. Also, Dutch authorities must monitor that all pension funds have enough financial reserves so that they can be able to pay retirees, especially the five largest ones.
What do these ratios mean?
The ratios listed here measure whether all pension funds in the Netherlands have enough money reserves to pay out pension benefits, to both current as well as future retirees. Funding ratios are calculated by dividing the value of a pension’s assets (investments) by the value of their liabilities (current and future benefits to be paid out). Values above 100 percent indicate that pensions have enough money reserves. The average funding ratio (in Dutch: gemiddelde dekkingsgraad) looks at the ratio in the current month, whereas the policy funding ratio (beleidsdekkingsgraad) looks at the average over the past 12 months. However, the funding ratio is subject to statutory rules as the 12-month average is measured against a minimum required ratio. If a ratio is too low, it must take measures to improve its financial situation. In extreme cases, this could lead to cuts such as pension benefits being lowered or not even being distributed at all. Since pension savings are more than half of all household assets in the Netherlands, this event could have serious consequences.
