Improving equity markets have largely offset the initially negative impact on Dutch pension funds of the UK’s decision to leave the European Union (EU), Mercer and Aon Hewitt have said.

According to the former, one week after the referendum, the average funding of Dutch schemes has fallen by about 1 percentage point.

Dennis van Ek, actuary at Mercer, estimated that, because the average Dutch coverage ratio had already dropped by 1 percentage point before the referendum, funding had fallen by 2 percentage points in total – to 96% – over the month of June.

Aon Hewitt, which employs a slightly different methodology, suggested funding even remained stable – at 97% on balance – over the course of the month.

Both consultants, however, agreed that ‘policy funding’ – the average coverage over the 12 months previous, and the main criterion for rights cuts – had fallen by 1 percentage point, to 100% (Mercer) or 99% (Aon Hewitt), over the period.

Frank Driessen, chief commercial officer for Retirement & Financial Management at Aon Hewitt, argued that the current economic climate demanded a revaluation of pensions.

“Either pensions need to be cut back, or contributions need to increase,” he said. 

Mercer’s Van Ek said recovering equity markets had almost made up for the initial post-Brexit losses, with developed-market equities losing 0.9% on balance but emerging-market equities returning 4.3%.

He attributed the further drop in Dutch funding to falling interest rates, noting that the 30-year swap rate had fallen by 24 basis points to 0.86%.

Mercer noted that yields on AAA-rated government bonds had fallen by nearly 40bps and that German 30-year bonds, for example, now generated 0.38%.

“As a consequence,” Van Ek said, “some pension funds had decided to replace their long-term German bonds with interest swaps, as well as other fixed income investments, such as credit and residential mortgages.”

Aon Hewitt said falling interest rates had increased pension funds’ liabilities by 4%, while their investment portfolios had also grown by 4% on balance.

It added that a 1% loss on global equity had been offset by a 6% increase in bond holdings for Dutch portfolios.

Last Monday, Mercer estimated that pension funds were heading for a funding drop of 5 percentage points as of the end of June, attributing 4 percentage points of that loss to the Brexit decision.

At the time, equity markets were significantly down, while 30-year swap rates stood at 0.82%.

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