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Indexation despite poor stock market results
03-03-2023
2022 was a turbulent year on the stock markets and returns were low. And yet, your pension fund was able to raise your pension by the legal maximum of 4.58%. How could that be?
The war in Ukraine that started in 2022 had a huge impact on the financial markets: large losses on equity and bond markets, rising interest rates and price inflation. Nevertheless, ING CDC Pensioenfonds was able to raise its pensions.
Financial position
The pension fund's financial position, i.e. its balance sheet, consists of assets and liabilities. These are the items on its balance sheet:
Assets
The pension fund's investments, such as bonds, equity and real estate
Liabilities
The value of the pension commitments that need to be paid out now and in the future.
Impact of interest rates
Interest rates have a significant impact on a young pension fund. Example: say a 40-year old man and a 50-year old man will receive a pension benefit of 100 euro per month from the beginning of their retirement at the age of 67.
The table shows how much the pension fund needs to keep in reserve at interest rates of 1% and 2% respectively:
- Interest rate 1%18,200
- Interest rate 2%12,400
- Difference32%
The impact of interest rate fluctuations is large and when a pension fund has a large proportion of younger participants even higher than if it has relatively many older participants.
Low interest rates
When interest rates are low, the pension fund makes more return, but it also needs to set aside more cash to be able to pay out future pension benefits. This is reflected in the table above.
Investments in bonds increase in value as well. However, in total, the pension fund’s commitments grow faster than its investments do, and as a result, its funding ratio decreases. If the policy funding ratio on 30 September 2020 is lower than 110%, the fund is legally not allowed to grant indexation.
High interest rates
When interest rates are high, the opposite happens. This was the case in 2022.Results on the stock exchange were poor with negative returns on almost all investments. However, as a result of high interest rates the pension fund needed to keep less cash to be able to pay lifelong pension benefits to its participants. The decline in assets was less than the decline in pension commitments. As a result, the pension fund’s funding ratio went up, enabling it to increase your pension for 2022 by 4.58%.
Questions?
We can imagine you might have questions about topics like indexation and pension accrual. You can get in touch with secretariaat@ing.cdcpensioen.nl. We will send you our reply within several days.
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