Belgian pension funds withstood the European stress test, even when faced with an unfavourable climate scenario, according to industry association PensioPlus.
Given the extremely difficult current conditions in financial markets, Belgian pension funds achieved an average return of -14.98% in 2022. “Further efforts will be needed to restore margins and recovery measures will be essential for a number of funds,” PensioPlus said in a statement.
At the end of last year, the European Insurance and Occupational Pensions Authority (EIOPA) announced the results of its stress test for pension funds.
In 2022, EIOPA conducted for the first time a climate stress test for pension funds to study the resilience of the European pension fund sector in the face of a climate change scenario.
Given the importance of sustainability and environmental risk management for pension funds as long-term investors, this was an important exercise for the sector, PensioPlus said.
The stress scenario in question assumed a sudden and disorderly transition of climate policy towards a green economy, leading to a sharp increase in carbon prices with transition risks for the whole economy.
Although, as the Financial Services and Markets Act 2000 points out, no conclusion on the current macroeconomic situation coudl be drawn from this stress simulation exercise, the results of Belgian pension funds were positive.
Belgian pension funds concerned were able to maintain full coverage of their liabilities in the stress scenario. This result was mainly due to the large safety margins maintained by the pension funds and the presence of strong sponsors, PensioPlus added.
In line with annual good practice, PensioPlus also organised a financial survey of its members in 2022. The PensioPlus survey of around 70% of total pension fund assets in Belgium is representative of the sector.
At the end of 2022, Belgian pension funds invested on average 36.1% in equities, 47.6% in bonds, 2.8% in real estate, 3.6% in cash and 9.9% in various alternative asset classes.
Long-term returns remain positive
PensioPlus said that 2022 was a difficult year for financial markets, with a war in Europe, a widespread energy crisis and historically high inflation.” In this chaotic macroeconomic context, the pension fund sector was not spared and posted a negative average return of -14.98%,” it said.
However, pension funds are above all long-term investors, the association said. Therefore, these short-term returns are less relevant to the sector.
The average long-term return over a 38-year period is nominally 6.07%. After deducting inflation, this amounts to a real return of 3.78%, it explained.
“Pension funds offer good long-term protection of purchasing power against inflation. For example: €100 invested in 1985 have become €310 today (corresponding to €721 in nominal terms), by applying the average historical return of the sector. In other words, in real terms, the return on investment is more than three times the investment (in nominal terms even more than seven times),” PensioPlus said.
The long-term return achieved by pension funds is therefore still well above the minimum return provided for by the legislation on supplementary pensions.