Average returns of -3.8% in the first quarter of 2022 took Portuguese pension funds to an average -0.2% return for the 12 months to 31 March 2022.
This contrasted with the three months to December 2021 which produced an average 1.4% return, with a 5.1% return for the 12 months to that date.
The Q1 2022 returns bring annualised three-year returns for Portuguese pension funds to 2.3% as at end-March 2022, with five-year returns of 2.2% to the same date, according to WTW.
These compare with 4.6% and 2.8% for the annualised three and five-year returns, respectively, to end-December 2021.
Performance figures were submitted to WTW by about 75% of the pension funds in Portugal, the overwhelming majority of them occupational funds.
According to José Marques, director, retirement, at WTW, most asset classes experienced a difficult first quarter, with equity portfolios generally falling between 3% and 5%, and bond portfolios by similar amounts, as a result of rising interest rates.
The sole exception was commodities, returning over 30%, but allocations to this asset class are very limited in the Portuguese market.
However, over a one-year time horizon, equity returns were still very strong, broadly offsetting the negative returns on bonds.
Marques said that all Portuguese pension funds have seen their asset allocations affected, directly or indirectly, by rising inflation.
For defined contribution (DC) funds, this has been in two ways, he observed.
“First, persistent inflation fears have had a negative effect on investment returns on both equities and bonds, hence affecting both conservative and aggressive funds,” he said. “Second, inflation has also reduced the real value of members´ savings, which will eventually have an impact on purchasing power at retirement.”
For defined benefit pension (DB) funds, Marques said that because long-term inflation expectations have increased, present and contractual future pension increases are likely to be higher.
“On the other hand, interest rates have risen materially, so that the accounting liabilities of these pension funds have reduced substantially,” he pointed out. “Overall, we expect most DB pension funds to be much better funded than they were at the end of 2021.”
He said some pension funds are now reviewing their investment strategy to take advantage of their improved funding position, which allows them to reduce the need for future expected returns, and hence risk.
“Some of these reviews are likely to result in a reduction in equity allocations and a closer liability-matching strategy,” he added. “However, we have not seen material shifts in asset allocation to date.”
At the end of March 2022, equities made up 20% of Portuguese pension fund portfolios, a slight decrease over the past quarter, according to data from regulator ASF and from the Association of Investment Funds, Pension Funds and Asset Management.
The bulk of assets – 62% – was in debt, compared with 61% at end-December 2021, but just under half of this was still in direct holdings of government bonds. Real estate allocations were 12%, a slight increase over the past quarter.