PFA Pension, Denmark’s biggest commercial pension provider, posted a mixed-bag of first quarter returns with a 5.9% equities gain, a 1.9% loss on bonds and a 4.5% loss for traditional average-rate pensions.

Kasper Ahrndt Lorenzen, group CIO of the DKK587bn (€78.9bn) pensions firm, said: “The past year was extreme in every way. However, even though the COVID-19 pandemic is still raging, the ongoing vaccine rollout has created hope that we can soon reopen society and return to normal everyday life.”

That optimism had driven equities in Q1, helping some firms that had been hit by the lockdown in particular, he said.

Listed shares returned 5.9% in the reporting period, alternative investments produced 1.6%, while property generated 0.2% and bonds lost 1.9%, PFA said.

The total return in the market-rate environment was 3.0% in the first quarter, it said.

The result for PFA’s average-rate pensions, however, was minus 4.5%, PFA added.

“The negative return in the average interest rate environment is mainly due to the fact that the value of the interest-rate hedging fell,” it said.

But the firm said that since this development was offset by a smaller need for provisions on the liabilities side, the impact on PFA’s collective reserves was limited – so would “therefore not affect the prospective return for PFA’s average interest rate customers”.

PFA, like most Danish pension providers, has been gradually shifting its customer base towards market-rate pension products from the traditional average-rate type of product over the last few years.

Although this change has reached a point where nearly all current contributions go to market-rate pensions, 38% of PFA’s total pension assets were still in average-rate pensions at the end of last year.

Ahrndt Lorenzen said markets showed in the first quarter how different asset classes were now going their separate ways.

“In the wake of the rising growth, we have seen that interest rates have risen, and that, for the first time in many years, there is a risk of inflation, partly reflected in rising commodity prices.

“As long as this development is gradual and occurs as a result of expectations for strong growth, the risk is limited,” he said, but added that in the longer term, it was a factor to watch.

It provided a new risk dynamic compared to the past year, he said, when lockdowns and vaccine development had set the agenda.

He said PFA had built up a broad portfolio of properties and alternative investments in recent years, which provided resilience in times of pressure on bond yields.

“In addition, we have adjusted our investment processes over the past year to make it easier to accelerate and take risks when there is a prospect of favourable conditions in the markets,” Ahrndt Lorenzen said.

“This provides a good foundation going forward, when we will have to navigate the intersection between positive growth expectations, increases in interest rates and concerns about inflation,” he said.

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