ABP to submit recovery plan as coverage ratio falls 50%

Elco BrinkmanABP, the world’s third largest pension fund, faces serious underfunding as a result of the financial crisis and will have to submit a recovery plan to De Nederlandsche Bank by March 31.

The fund’s coverage ratio has fallen to 90 per cent at the end of 2008, due to a drop in the actuarial interest rate at the end of the year to 3.6 per cent, and a return on investments for the year of -20.2 per cent.

At the end of 2007 the fund had a coverage ratio of 140 per cent; with an actuarial interest rate of 4.9 per cent and a return on investments of 3.8 per cent. Once the coverage ratio falls below 105 per cent the fund is required to report to the Bank on its plan to eliminate the underfunding within three years, and that the value of the assets will be on the level specified by the Pensions Act within 15 years.

The fund’s chairman, Elco Brinkman, said like other pension funds ABP had suffered greatly from the consequences of the financial crisis, with its assets now sitting at €173 billion (US$223 billion).

“This crisis, which evolved very rapidly in the last few months of 2008, is the worst every in ABP’s history,” he said. “In the last quarter of 2008, the fund lost approximately €22 billion of the almost €80 billion ABP had made with investments after the dot-com crisis between 2003 and 2008. Our focus over the coming months will be on recovering the fund’s financial position.”

At the end of 2008 the fund, which has 2.6 million members, had US$57.7 billion (US$57.7 billion) in fixed income, US$63 billion in equities and alternatives; and US$77.7 billion in other investments.

The fund is required to set an actuarial interest rate, equivalent to the swap rate, in order to determine its forecast return on capital. While this now sits at 3.6 per cent, the fund has returned an average of 5.9 per cent over the past 15 years.