WILLEMSTAD, PHILIPSBURG - The pension sector average funding ratio improved to 106.1% in 2020, a 0.5% increase compared to the previous year. This is well above the minimum requirement of 100% imposed by the Centrale Bank van Curaçao and Sint Maarten (CBCS). Pension assets rose faster than liabilities in 2020, indicating a sound performance of the sector. Nevertheless, it is important to remain vigilant for growing vulnerabilities that may affect the pension sector in the medium to long term. The Financial Stability Report, published by the CBCS, describes the main vulnerabilities associated with the local pension sector(1).
The pension sector’s average funding ratio has remained steadily above the minimum threshold of 100% since the inception of the monetary union in 2010. The sector accounts for approximately NAf. 9 billion in assets, which translates to 143% of the monetary union’s GDP. The sector had a solid performance in 2020, when total assets grew by 2.9% and an aggregate profit of NAf. 54 million was realized.
The outlook for the pension sector is slightly negative due to prospects of high market volatility and a bearish market. The prolonged low interest rate environment and lingering pandemic consequences remain a challenge for pension funds. Uncertainties remain high due to disruptions in the global supply chain system. Elevated inflation adds further pressure to pension funds’ asset valuations. Furthermore, increased geopolitical risk due to the invasion of Ukraine underlines the turbulent times ahead.
Furthermore, CBCS remains vigilant for signs of growing vulnerabilities within the local pension sector. A source of concern to the CBCS is the possible undervaluation of pension liabilities. Current valuation guidelines do not accurately reflect market conditions. The CBCS is revising the existing valuation guidelines and recognizes the importance of adequate provisioning to reduce vulnerabilities. It is imperative that the valuation of the pension liabilities is based on adequate discount rates to achieve a fair representation of the financial soundness of the pension funds.
The CBCS also recognizes that the 60/40 investment rule can pose challenges for investment decisions by pension funds, steering them to hold time deposits at local banks. This gives rise to growing interconnectedness between pension funds and banks. The CBCS will be evaluating the 60/40 rule in 2022 to see if there are options to better align the demand and supply, while keeping the objectives of monetary policy intact.
(1) The pension fund sector is based on the most recent available data, which covers 2020, in accordance with current legislation. An outlook for the short- and medium-term sector developments is incorporated to address this shortcoming.