Average gains of 1.6% in the second quarter of 2023 took Portuguese pension funds to an average 2.9% return for the 12 months to 30 June 2023.

In contrast, the three months to end-March 2023 had produced an average 2.8% return, with a -5.3% return for the 12 months to that date.

The Q2 2023 returns bring annualised three-year returns for Portuguese pension funds to 1.0% as at end-June 2023, with annualised five-year returns of 1.1% to the same date, according to WTW.

These compare with 2.4% and 0.8% for the annualised three and five-year returns, respectively, to end-March 2023.

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

José Marques, director, retirement, WTW, said the higher returns for the 12-month period to end-June 2023, compared with the 12 months to end-March 2023, were mostly because the Q2 2022 returns of -6.6% had dropped out of the later period.

He said that overall, the second quarter of 2023 saw positive returns for most Portuguese pension funds.

“Global equities had the highest impact on performance over the quarter, with returns close to 6%,” he told IPE. “European equities had slightly lower returns of around 2%.”

But both government and corporate bonds made very low returns, though still positive.

At the end of June 2023, equities made up 19% of Portuguese pension fund portfolios, down from 20% over the past 12 months, according to data from regulator ASF and from the Association of Investment Funds, Pension Funds and Asset Management.

The bulk of assets – 65% – was in debt, up from 61% at end-June 2022 with 36% in direct holdings of government bonds, up from 29% a year earlier.

Meanwhile, real estate allocations formed 11% of pension fund portfolios, slightly down on the year before.

“Within the bond allocation, we have seen some pension funds taking the opportunity to increase duration, which allows them to reduce interest rate risk – in the case of defined benefit pension plans – but also lock into higher levels of interest rates,” Marques told IPE.

He added: “Pension funds in Portugal have been underweight duration for a long time, but we are seeing some reversion of that trend because of the higher yields available on bonds.”

In relation to risk management, Marques said defined benefit pension funds had a unique opportunity to reduce their interest rate risk, i.e. the mismatch between liability and asset duration.

“After years of very low interest rates, they are now much better funded and able to increase their duration or allocation to bonds, therefore reducing duration mismatch while locking in to healthier levels of interest rates,” he observed.

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