Millions face lower pensions next year as central bank gets tough

Millions of people face cut of up to 7% in their corporate pensions next year, as the central bank orders funds to get their finances in order.


In total, 125 funds representing some 40% of all pensioners will have to cut pay-outs because they no longer have enough assets to meet their obligations.
Central bank director Joanne Kellerman told the Financieele Dagblad pensions had never been reduced on such a scale before. ‘We want to give clarity and remove uncertainty about the size of the cuts,’ she said.
Coverage
The central bank has given the funds until the end of this year to get their coverage ratio back up to 105%. If they fail, pensions will need to be reduced.
However, the central bank has taken the ‘highly unusual’ step of altering the way it calculates how much money pension funds should have in their reserves, the Volkskrant reported on Friday.
The bank has opted to use a three-month average rather than the year-end interest rate to make the calculations. This is because interest rates have been extremely low for a long period. The lower the interest rate, the higher pension fund reserves need to be.
Maximum cut
In addition, the bank has opted to limit the maximum reduction to 7%. On average, pensions will be cut by 2.5%.
‘The extraordinary situation on the financial markets makes this decision necessary,’ the central bank said in a statement. ‘The aim of both measures is to reduce the uncertainty over pensions’.
The changes in calculations means that 125 funds rather than 180 will be forced to make cuts next year, unless the financial markets improve.

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