Concerns about the economic consequences of the spread of the coronavirus throughout the world have increased. This has consequences for all the pension funds in the Netherlands, therefore, also for Pensioenfonds PGB.
What has happened?
Due to uncertainty about the impact the coronavirus will have on the world’s economy there has, for sometime, been an extremely unstable situation in the global stock markets. Furthermore, interest rates have fallen as more investors want to invest their money in bonds.
Last week, the American central bank (the FED) decided to lower its rate of interest and this raised longer-term concerns about the economic consequences of the coronavirus. Moreover, at the weekend, Russia and Saudi Arabia failed to reach agreement in respect of the production of oil. These two incidents caused last Monday (9 March 2020) to be a black day as far as the stock markets were concerned; the price of shares fell by approximately 7 percent.
Consequences for pension funds
Pensioenfonds PGB feels the consequences of this in two ways. Due to the sharp fall in the price of shares, the value of our assets has declined and, in accordance with the legal rules, lower interest rates mean that more assets are required to be able to pay out the agreed future pensions. These two developments have caused the financial situation - the coverage ratio - to deteriorate.
A pension fund invests for the long term. At the end of each year, a pension fund prepares its balance sheet and considers its position. If, on 31 December, the financial situation is not sufficiently healthy, according to the government’s rules, a pension fund may have to decide to reduce the pensions it pays out. Currently, it is not exactly clear what the long-term consequences of the coronavirus will be, although it is anticipated that the crisis surrounding the virus will cause economic growth to slow down.
On Tuesday 10 March 2020, Pensioenfonds PGB held an extra meeting to examine all aspects of the situation. During the meeting it was established that we are close to our critical coverage ratio. That is to say that if the interest rate and the share prices remain at their currently low level until the end of the year, there is a chance that the pension fund will be forced to lower its pensions in 2021.
However, there is still a long time to go until we are that far. If the financial markets recover in the course of the year, the chance that the pensions have to be lowered will also reduce. It was also established that the dynamic investment policy adopted by Pensioenfonds PGB is working as was intended: if the chance of a pension reduction increases due to a lower coverage ratio, less risk is taken when investing.
Less risk than at the start of the year
That is precisely what has happened over the last few weeks: Pensioenfonds PGB is taking significantly less risk than at the start of the year. For example, less is being invested in shares and the so-called interest rate hedge (protection against interest rate reductions) has increased.
It has, therefore, been decided that the current policy should be adhered to in the coming period. However, this policy could not and cannot prevent the coverage ratio falling significantly. The consequences of the fall in the value of assets and the lower interest rate are too great to have prevented this. The board of the pension fund, the investment advisers and asset managers are all keeping a close eye on the short-term developments, and, if necessary, the prevailing policy will be adjusted.