The funding ratio is the most important yardstick for measuring the financial position of a pension fund. It presents the ratio of the assets on one side of the balance sheet and the liabilities on the other side in a percentage. The assets are mainly the investments in which the contributions of the employers and employees have been invested. The liabilities are the pensions that the fund must pay now and in the future to the participants. If the funding ratio is 100%, there is exactly enough money to pay all the pensions. If the funding ratio is lower, there is a coverage deficit. If the funding ratio is higher, there is a surplus. There is a funding ratio for each of the three sections of the DEPF. More about this later.
Good investment returns
The value of the assets depends on the prices on the financial markets. These were negative in 2018 due to various economic and political tensions in the world. The return for the whole of 2018 was more than 6% negative and as a result, the value of the investments decreased. However, the DEPF achieved a positive return of 17% over the period from January to October 2019 and the pension assets increased in value. This has a positive effect on the funding ratio.
Financial position of section DuPont Belgium is solid
On the opposite side of the investments on the balance sheet are the future pension liabilities. The pension fund has to make an assessment of the future (interest) income in its valuation of the liabilities. For the section DuPont Belgium, an expected return of 4% is taken as the basis for this assessment. The actual investment returns in 2019 were higher so that the funding ratio increased. In Belgium, a minimum limit of 100% applies for the funding ratio. As soon as the funding ratio drops below 100%, the employer immediately has to make an additional contribution or take recovery measures. This was the case in the previous three years. It looks like the funding ratio will rise considerably above the limit of 100% in 2019, which makes the financial position of this section strong.
Negative impact of low interest rate for Dutch sections
The pension liabilities of the two Dutch sections are, in principle, also valued on the basis of the expected investment return. However, the Dutch legislation makes more stringent demands: for the short term the legal actuarial interest rate for value transfers of pensions must also be taken into account. At this moment, this last-mentioned requirement is leading as the interest rate for value transfers is very low. Moreover, from 1 October 2018 until 1 October 2019, the interest rate dropped from 1.5% to 0.2%. The lower the interest rate, the more capital the pension fund has to keep available as per today in order to be able to meet all future liabilities. This increase of the liabilities has a negative impact on the funding ratio.
Uncertainty about indexation in Dutch sections
For the sections DuPont Netherlands and Genencor Netherlands the increase of the funding ratio as a result of the good investment returns is annulled by the increase of the liabilities as a result of the decrease of the interest rate. This will probably cause that we will not or will not fully be able to grant indexation to increase the pensions of the non-active participants of the Dutch sections as of 1 January 2020. We cannot make a definite statement about this yet as the investment performance in the final months of 2019 will still influence the funding ratio as per the end of 2019. The formal indexation decision will be taken by the board in June 2020.