Did Britain Just Bankrupt Dutch Pensions?

The Netherlands’ precarious funding situation may be tipped over the edge by Brexit-induced market falls.

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 else.

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 threshold.

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.

Related: ‘Majority’ of Dutch Pensions Breach Solvency Levels & European Pensions Plea for Political Help