KPMG Pensions Accounting Survey in the Netherlands 2016 Year-End preview and 2015 Year-End retrospective kpmg.nl
2 KPMG Pensions Accounting Survey in the Netherlands Content Introduction 3 Headlines 4 Change in pension legislation 4 Developments in IAS 19 5 Other trends and changes 6 Discount rate 7 Inflation rate 12 Life expectancy 13 About KPMG the Netherlands 15
2016 Year-End preview and 2015 Year-End retrospective 3 Introduction Under IFRS companies are required to estimate the value of their pension liability. IAS 19 prescribes assumptions to calculate liabilities and asset values covering these liabilities. The guidelines in order to determine these assumptions are provided in paragraph 75-98, but actuarial and advisors interpret and apply these guidelines in different ways, resulting in a wide variety of used assumptions. As a consequence, company directors face a range of alternative actuarial assumptions to choose from. In this year s KPMG Pensions Accounting Survey, we take a closer look at the developments in assumptions listed companies have used to value their pension liabilities as at 2015 Year-End. The presented figures are based on publicly available information on companies quoted on the Euronext Amsterdam stock exchange. These companies are advised by all the major actuarial firms and therefore provides insight on how the IFRS guidelines are set into market practice in the Netherlands.
4 KPMG Pensions Accounting Survey in the Netherlands Headlines The average IAS 19 discount rates applied at the Year-End 2015 has increased compared to a sharp decline in the Year-End 2014 report. The applied discount rates varies per advisor and discount rate methodology. Following the KPMG zero coupon guidance curve, Year-End 2015 yields show an increase compared to Year-End 2014 with yields increasing more for longer maturities. However, in 2016 it is observed that discount rates dropped significantly, resulting in negative yields for shorter maturities. An ongoing trend is observed over the last years of companies closing their defined benefit plans, and opening defined contribution plans under IAS 19 for new participants. In the Year-End 2015, it is observed that some companies transfer closed defined benefit plans into defined contribution plans. A significant number of companies reported actuarial losses during the year 2015, due to changes in financial assumptions or demographical assumptions for the valuation of liabilities. However, the total actuarial loss of about 8 billion at Year-End 2015 is significantly lower compared to the loss of 40 billion in 2014. The total defined benefit obligation over the listed companies decreased significantly with about 13% compared to 2014. Over all companies, also the value of plan assets has decreased substantially with 9%, but is smaller compared to the drop in defined benefit obligation. The new presented mortality table by the Dutch Actuarial Association (AG2016) show an overall increasing life expectancy trend. Compared to AG2014 mortality table, a further increase of life expectancies is observed for females and a stable life expectancy for males. Change in pension legislation As of 1 January 2016, new pension legislation in the Netherlands allows multiple pension funds to be accommodated in one general pension fund (Dutch: Algemeen Pensioenfonds, Apf), where: - The capital is ringfenced per pension fund but controlled by one governance. - Smaller pension funds can benefit from the same economies of scale as large pension funds. - Different collectivity circles in defined contribution and defined benefit plans within one Apf raise new IFRS reporting questions. As from 2015 the Ultimate Forward Rate is calculated as the moving average of the 20 year forward rate averaged over 120 months. The Ultimate Forward Rate is used for calculating liabilities with maturities longer than 20 years under local pension fund legislation We expect a further decrease in the Ultimate Forward Rate as a result of decreasing discount rates over the last 10 years, possibly resulting in lower funding ratios and higher contributions to be paid.
2016 Year-End preview and 2015 Year-End retrospective 5 Developments in IAS 19 The Year-End 2014 Accounting Survey discussed the proposed amendments in the Exposure Draft by the international Accounting Standards Board (IASB) to IAS 19 and IFRIC 14. The Interpretation Committee considered and discussed comment letters and recommended the board to finalise these proposed amendments. A decision of the board is still outstanding and thus it is unsure when the amendments will come into effect. To summarize the proposed amendments: When a plan amendment, settlement or curtailment occurs part way through the reporting period, it is proposed to calculate the current service costs and the net interest for the remaining period using the actuarial assumptions applied to the remeasurement. Also, the net interest for the remaining period will be calculated based on the remeasured net defined benefit liability (or asset). Furthermore, the interaction between the asset ceiling and the calculation of past service costs or the gain or loss on settlement is clarified. In case when a plan amendment, curtailment or settlement occurs, the current account guidance is not clear on whether the calculation of the past services costs or the gain or loss on settlement is: (a) based on the entire plan surplus or deficit; or (b) adjusted for the effect of the asset ceiling. The proposal entails that the entire plan surplus or deficit will be used (before any adjustments for the asset ceiling). Hence, the past service costs or the gain or loss on settlement is calculated by considering the difference between the surplus (or deficit) in the plan before the event and after it. We cite the Interpretation Committee on their further recommendations to the board: an entity should apply the amendments to IFRIC 14 retrospectively (with an exemption for adjustments to the carrying amount of assets outside the scope of IAS 19); an entity should apply the amendments to IAS 19 prospectively; no transition relief should be provided for first-time adopters; and an entity should apply the proposed amendments for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted.
6 KPMG Pensions Accounting Survey in the Netherlands Other trends and changes From 2013 on, a trend is observed of Dutch companies closing defined benefit plans under IAS 19 defined benefit requirements. At the beginning of this trend, only new participant had been introduced to new defined contribution arrangement. Now, a significant number of companies transfer also existing participants towards these new defined contribution plans and therefore lower the exposure largely to defined benefit obligations. Compared to the Year-End 2014 review, the total defined benefit obligation of the listed companies decreased significantly with 13%. The first reason could be explained because of the impact of a higher discount rate, used in discounting the future obligations. The second reason of a decrease in total defined benefit obligation, could be the trend of companies transferring defined benefit into defined contribution plans.
2016 Year-End preview and 2015 Year-End retrospective 7 Discount rate The estimated cash flows are discounted to form the defined benefit obligation. Following the requirements in IAS 19 paragraph 83, the discount rate should be determined by reference to market yields on high-quality corporate bonds at the balance sheet date. AA rated corporate bonds are a common practice in the market to determine the discount rate. Development of the discount rate The discount rates per Year-End 2015 show an increase compared to those at Year-End 2014, especially for the longer maturities. The differences between the discount rate curves as used by KPMG at Year-End 2014, Year-End 2015 and October 2016 are shown in the figure below. The curves at Year-End 2014 and 2015 on shorter maturities show less differences than on the longer maturities, given only a 4 basis points difference for yields with a one year maturity and only a 17 basis points increase for yields with a maturity of five years. As maturities increase, so does the increase in yields between Year-End 2014 and 2015, resulting in a maximum increase of 77 basis points for yields with a maturity of thirty years. However, during 2016 the discount rates dropped significantly, even resulting in negative yields for shorter maturities, as can be seen in the curve of October 2016. In this curve all yields with a maturity shorter than four years are negative, and the difference with the yield curve per Year-End 2015 amounts to a decrease of 108 basis points for yields with a maturity of thirty years. The overall decrease during 2016 is mainly caused by the general market situation in the Eurozone, with in particular the massive market reactions to the Brexit referendum in June 2016, and effects of the prolongation of the quantitative easing programmes of the ECB. The interest rates of October 2016 do show a recovery with respect to the curves of the months closely after the Brexit referendum. In general, higher discount rates lead to a lower DBO, and vice versa. The discount rate per Year-End 2015 is somewhat higher than the discount rate per Year-End 2014, and for several major surveyed companies we have accordingly observed a lower DBO per Year-End 2015. However, as we generally see the discount rates decreasing over 2016, we expect an increase in benefit obligations and actuarial losses on financial assumptions. Zero coupon yield curves 3.50% 3.00% 2.50% 2.00% Spot rate 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Maturity (years) 31-12-2014 31-12-2015 30-09-2016 2013 2016 KPMG Advisory N.V.
8 KPMG Pensions Accounting Survey in the Netherlands Historical and expected development of corporate AA bonds During 2015 we have seen quite some movement on the AA-bond market, showing a decrease in spot rates during the first few months and a recovery from March onwards. The graph below shows a vast decrease in spot rates during 2016, with the steepest descent in June. The graph also shows the recovery in spot rates in October, resulting in an almost similar 15-year spot rate to May. The spreads are relatively stable over 2016, but show a slight peak in June as well. Development of 15-year spot rate 2.25% 2.00% 1.75% 1.50% Percentage 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% Dec 2015 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 KPMG AA ECB AAA
2016 Year-End preview and 2015 Year-End retrospective 9 Variation in advised discount rates The requirements for discount rates described in IAS 19 are rather principle-based, which leads to varying discount rates for the Eurozone advised by different actuarial firms. The graph below contains seven different discount curves as used per Year-End 2015 by five different actuarial firms (one firm uses separate curves for The Netherlands and Europe, one other issues an additional high end bonds curve). Differences between the curves arise from differences in applied methodologies. These differences can, for example, be found in the theoretical fitting method of the curve on bond data, the extrapolation techniques used for the longer, illiquid maturities, and in the AA rated corporate bond universe used to derive the yields from. Zero coupon yield curves 31 Dec 2015 3.50% 3.00% Spot rate 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Maturity (years)
10 KPMG Pensions Accounting Survey in the Netherlands The advised discount rate for a 15-year maturity ranges from 1.98% to 2.47% between the different actuarial firms at Year- End 2015, averaging on 2.22%, which is 55 basis points higher than per Year-End 2014. The advised discount rates for 25-year maturities ranges from 2.35% to 2.94%. As the value of the defined benefit obligation depends on the discount rate, differences between the advised discount rates can have a significant impact on the reported value of the defined benefit obligation. In the graph below we provide insight on what the impact could be, comparing the estimated additional obligation to be reported when using the lowest advised discount rate, as compared to when using the highest one. For a 15-year maturity the difference between the lowest and highest advised discount rates amount to a difference in the calculated defined benefit obligation of approximately 7.4%. This figure compares to the one reported in the KPMG Accounting Survey of 2013, and is an increase compared to the 3.4% reported in last year s survey. Impact on DBO of minimum versus maximum discount rates 20% 18% 16% 14% Increase in DBO 12% 10% 8% 6% 4% 2% 0% 5 10 15 20 25 30 Maturity (years)
2016 Year-End preview and 2015 Year-End retrospective 11 Discount rates applied by listed companies The graph below displays the discount rates applied by the listed companies over the year 2015. In 2015, the surveyed companies applied discount rates within a range from 0.80% to 4.34%, having an average discount rate of 2.52%. About 60% of the listed companies use a discount rate between 2.05% and 2.75%. The average discount rate compared to 2014, increased with 27 basis points after a sharp decline as described in the Accounting Survey of last year. A future decline of discount rates is expected for the Year-End 2016, as interest rates till September 2016 show a significant drop, and the discount rates per October 2016 only show a slight recovery. Impact on DBO of minimum versus maximum discount rates 30.00% 26.00% 26.00% Percentage of companies 25.00% 20.00% 15.00% 14.00% 10.00% 8.00% 5.00% 4.00% 4.00% 4.00% 4.00% 6.00% 2.00% 2.00% 0.00% < 1.0% 1.35% 1.70% 2.05% 2.40% 2.75% 3.10% 3.45% 3.80% 4.15% 4.15% Discount rates
12 KPMG Pensions Accounting Survey in the Netherlands Inflation rate Over 2015 inflation rates increased with respect to 2014 for shorter maturities, as can be seen in the Euro swap implied inflation curves in the graph below. The term structures for maturities of 18 years and longer are quite similar. In October 2016 the swap implied inflation rates for shorter maturities are above those per Year-End 2015, whereas they are lower than those from maturities of 10 years and upwards. For 30-year maturities the swap implied inflation rate is 1.56% per October 2016, which is 20 basis points below the Year-End 2015 figure and well below the long-term expected target rate of 2% as set by the ECB. Inflation rates used at Year-End 2015 At the Year-End 2015, it is observed that listed companies assumed an inflation rate of 1.90%, compared to an assumed inflation rate of 2.01% over 2014 and 2.22% over 2013. On average, companies seem to follow the ECB long-term inflation rate expectation of 2%. It is observed that the assumed inflation rate shows a decreasing trend and is expected to decrease further in 2016, as suggested by the graph below. Euro swap implied inflation 2.50% 2.00% 1.50% Inflation rate 1.00% 0.50% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30-0.50% -1.00% Maturity (years) 31-12-2014 31-12-2015 30-09-2016
2016 Year-End preview and 2015 Year-End retrospective 13 Life expectancy At the end of 2015 the majority of the companies in scope applied the mortality table issued by the Royal Dutch Actuarial Association (Koninklijk Actuarieel Genootschap, hereafter AG) in 2014 (AG2014). Sometimes the mortality table is adjusted for experience ratings within the specific sector or membership profile. In September 2016, the AG issued a new mortality table (AG2016). We expect that this mortality table will be used by a number of companies for the disclosure of the 2016 year-end IAS 19 figures. The tables below show the life expectancies as predicted by the AG2014 and AG2016 mortality tables. Overall, life expectancies show an increasing trend. Compared to the AG2014 table the life expectancies for females increase further, while the life expectancy for males remains around the same level. This change for females is a consequence of the introduction of correlations in the determination of the life expectancies. Life expectancy based on AG2014 Males Females age 2014 2039 2064 2014 2039 2064 0 90,1 92,5 93,6 92,5 94,6 95,4 25 62,6 65,5 67,7 65,3 67,8 69,7 45 40,5 43,8 46,4 43,4 46,3 48,5 65 20,0 23,1 25,6 23,0 25,8 28,0 85 5,9 7,0 8,0 6,9 8,1 9,3 Life expectancy based on AG2016 Males Females age 2014 2039 2064 2014 2039 2064 0 90,1 92,5 93,6 93,0 95,1 95,9 25 62,6 65,5 67,7 65,9 68,4 1,0 45 40,4 43,8 46,4 43,8 46,8 49,1 65 20,0 23,2 25,7 23,1 26,2 28,4 85 5,8 7,0 8,0 6,8 8,3 9,5
14 KPMG Pensions Accounting Survey in the Netherlands The graph below displays the life expectancy at the age of 65 for males and females, as forecasted by the AG2014 and AG2016 mortality table. From the graph it can be seen that for pension plan with predominantly female participants the pension costs will increase as a result of the improvement in longevity. While for pension plans with an older or predominantly male population the impact of the new mortality table is limited. Life expectancy of 65-year olds 30 28 26 24 22 20 2016 2022 2028 2034 2040 Life expectancy (years) 2046 2052 2058 2064 Year AG2016 (males) AG2016 (females) AG2014 (males) AG2014 (females)
2016 Year-End preview and 2015 Year-End retrospective 15 About KPMG KPMG Netherlands offers services in the fields of audit, tax and advisory. We offer our services to a broad group of clients: major domestic and international companies, medium-sized enterprises, non-profit organisations and government institutions. The complicated problems faced by our clients require a multi-disciplinary approach. Our professionals stand out in their own specialist fields while, at the same time, working together to offer added value that enables our clients to excel in their own environment. In doing so, we draw from a rich source of knowledge and experience, gained worldwide in the widest range of different organisations and markets. We provide real answers so that our clients can make better decisions. Financial Risk management (FRM) Financial Risk Management offers creative business strategies to clients in the rapidly changing insurance and pensions industry. We also bring insight and quantitative analytic skills to other clients assisting them with the challenges they are facing. We support numerous pension funds and companies with advice on pension plan design, pension valuations and risk analysis. Our team of (qualified) actuaries works together with other KPMG professionals to form multi-disciplinary teams and guarantee the best service for our clients.
Contact us Alexander van Stee T: +31 (0)20 656 4673 E: vanstee.alexander@kpmg.nl Peter Bosschaart T: +31 (0)20 656 4404 E: bosschaart.peter@kpmg.nl Machiel Koper T: +31 (0)20 656 4688 E: koper.machiel@kpmg.nl Janinke Tol T: +31 (0)20 656 7386 E: tol.janinke@kpmg.nl Giel de Visser T: +31 (0)20 656 7009 E: devisser.giel@kpmg.nl) www.kpmg.nl The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation., registered with the trade register in the Netherlands under number 33263682, is a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The name KPMG, logo and cutting through complexity are registered trademarks of KPMG International.