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Dutch c.bank unveils pension plan that may cut long-term debt demand

AMSTERDAM, Oct 3 (Reuters) - The Dutch central bank announced new plans for how pension funds should calculate their long-term liabilities on Wednesday, in a move that could reduce demand for long-term government debt.

Dutch pension funds hold about 800 billion euros ($1 trillion) in assets between them, and shifts in their investment strategies can have a significant impact on markets in the securities they hold.

If the plans are confirmed by parliament, the interest rate used to calculate long-term liabilities will be replaced by a much higher, so-called ultimate forward rate.

This move will make it easier for pension funds to hedge their very long-term liabilities because it will allow them to assume that returns will be higher in the distant future than they are today.

Until now, pension funds' long-term liabilities have been calculated based on the returns they can expect to make on their holdings based on current interest rates.

The ultimate forward rate tends towards 4.2 percent as the date of the liability moves out towards 60 years, while the yields on Dutch government bonds maturing in 10 years' time are well below 2 percent at the moment.

Falls in the interest rate can reduce a fund's coverage of its long-term liabilities, even if the value of its portfolio of assets remains unchanged, forcing it to buy long-duration debt.

"Since the interest curve for obligations with long durations will be more stable, cover ratios will move less," the bank said in a statement.

"Pension funds' (investment) policy decisions will become less dependent on day-to-day price moves."

Parliament will vote on the changes only after the next government is formed. The pro-business Liberal and social democratic Labour parties are currently in talks on forming a new government following September elections.

Dutch pension schemes have long been regarded as very well funded, but low interest rates have put them under pressure.

In September, the central bank reported that funds' cover ratios stood at 97 percent, meaning their assets were below the level needed to cover their liabilities, although this was an improvement over the ratio in June of 94 percent.

The new measures would help to reduce distortions to the relatively illiquid market for very long term government debt, said Theo Kocken, partner at Cardano, an investment consultancy.

"The problem with the current system is that after 30 years, markets are so illiquid, you can't say there is a market," he said, adding that transactions by a big pension fund can move the market by 1 percent.

The central bank's regulations flesh out proposals announced by the caretaker government in late September aimed at reducing the burden on pension funds struggling to cover liabilities.

Pension funds would be given a one-off exemption next year from their obligation to take in higher premiums from members if they have a funding shortfall. They would also be able to spread cuts to benefits paid to their members over several years.

On Monday, the Liberal and Labour parties said they had agreed to accelerate a planned rise in the retirement age. Currently, workers draw a state pension from 65 but that will rise to 67 in 2021. They also agreed that, as a transitional measure, some employees approaching retirement age would be offered a pension bonus if they carry on working for an extra six months. ($1 = 0.7751 euros)

(Reporting by Thomas Escritt; Editing by Sara Webb and Hugh Lawson)

((Thomas.Escritt@thomsonreuters.com)(+31 20 5045006)(Reuters Messaging: thomas.escritt.thomsonreuters@reuters.net))

Keywords: DUTCH PENSIONS/