The UK’s vote to leave the European Union could have a
profound impact on pension funds beyond British shores. Just ask the Dutch.
“There is not much risk budget available to look for opportunities at the moment.”Angelien Kemna, chief finance and risk officer at the €415
billion ($459 billion) Netherlands pension manager APG, has often spoken of
focusing on funds’ ability to maintain monthly payouts to pensioners above all
However, following the UK’s vote to leave the European Union
and the subsequent market volatility, this mission has become much harder.
“In the weeks before the referendum, the general mood was
that we should prepare [for Brexit],” said Martijn Vos, managing director at
consultancy Ortec Finance. “This meant diversify, get out of any overweights to
financials, and mitigate exposure to sterling. Investors have been positioning
their portfolios so they are prepared for the medium-term consequences.”
There was only so much pension funds could do, however. The
Dutch system was already
struggling for solvency due to ultra-low interest rates imposed by the European
Central Bank prior to the referendum, with many pensions facing the serious
prospect of being forced to cut payments to retirees.
In January, De Nederlandsche Bank (DNB), which regulates the
Netherlands’ €1.1 trillion pension system, reported that more
than half the funds it monitored had fallen below the 105% funding ratio
required to be considered solvent.
Average ratios were still below regulatory requirements
prior to the UK’s referendum on June 23, and could be “three to five points
lower” after Friday’s market moves, according to Martijn Vos.
Price weaknesses in
markets may present buying opportunities in the weeks and months ahead, but Vos
warned there was “not much risk budget available to look for opportunities at
the moment” for most Dutch funds.
At APG, a statement issued on June 24 laid out the situation
starkly: “We see that investors worldwide, surprised by the outcome, now shun
risk and flee into safe government bonds. This presses down interest rates and
that hurts pension funds on the liability side. Furthermore, equities are sold
off, depressing share prices. That too is not beneficial for investment
portfolios of pension funds in the short run. Both developments have a negative
impact on the coverage ratios of pension funds, although it remains to be seen
how long that effect will last.”
The DNB said in January that pensions representing 3.4
million active members and 1.7 million retirees had funding ratios below 105%.
Data from the end of 2015’s third quarter indicated that 129 pension plans—more
than half of the funds monitored by the regulator—had fallen below this
Dutch funds are obliged to lower current pension payments if
funding ratios are unlikely to improve. However, the DNB last year extended the
recovery period funds use to assess potential benefit cuts to 12 years.
In general, the Dutch position has deteriorated from an
already difficult position before the vote, Vos concluded.
Those that may lose out could be forgiven for blaming the 17
million Brits who voted ‘leave’ last week.
of Dutch Pensions Breach Solvency Levels & European
Pensions Plea for Political Help