Overly conservative asset allocations used by Portugal’s defined contribution (DC) pension plans may not produce high enough returns to give participants an attractive retirement income, José Marques, head of retirement Portugal, at WTW, has warned.

“This has a negative effect on public perception of pension funds, despite their being a great vehicle for investment if designed correctly,” he said.

Marques was commenting on the average gains of 0.4% in the final quarter of last year for Portuguese pension funds, although the return for calendar 2024 was 6.3%.

In contrast, the three months to September 2024 had produced an average 2.7% return, with a 12% return for the 12 months to that date.

Performance figures were submitted to WTW by about 75% of the pension funds in Portugal, the overwhelming majority of them occupational funds.

Most investment returns during 2024 came from a strong year for global equities, Marques pointed out.

“Global equities also made strong returns in Q4, but not enough to compensate for the low returns from bonds, making up most of the portfolios, and the poor returns from European equities, to which many Portuguese pension funds are overly exposed,” he said.

“This is unlike the rest of the year, where we had strong equity returns both globally and in Europe, which more than compensated for the low bond returns.”

There has been little change in traditional asset allocations over recent years.

At end-December 2024, equities made up 19% of Portuguese pension fund portfolios, the same as the previous year, according to data from regulator ASF and from the Association of Investment Funds, Pension Funds and Asset Management.

The bulk of assets – 66% – was in debt, slightly up in December 2023, with 37% in direct holdings of government bonds. Real estate allocations formed 10% of pension fund portfolios, slightly down on the year before.

However, Marques said he is seeing some slow-moving trends in pension fund allocations – removing the historical bias to European equities, a higher allocation to alternative assets and wider adoption of ETFs and index funds.

Meanwhile, short-term interest rates have continued to fall during 2025, while long-term interest rates continue to rise, giving low returns on bonds.

“For defined benefit funds, the current level of interest rates offers the opportunity to reduce the interest rate duration gap relative to liabilities,” Marques observed. “We are seeing some pension funds reviewing their asset allocation to close this gap, and crystallise some of the surplus built up over the past couple of years.”

But he cautioned: “We believe that inflation is a significant risk, though we feel it is no longer top of mind for many of the pension fund sponsors. Pension funds should be looking to hedge this risk through greater use of inflation-linked instruments.”

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