Average gains of 1.4% in the final quarter of 2021 took Portuguese pension funds to an average 5.1% return for the 12 months to 31 December 2021.

In contrast, the three months to September 2021 had produced an average 0.3% return, with a 7.3% return for the 12 months to that date.

The Q4 2021 returns bring annualised three-year returns for Portuguese pension funds to 4.6% as at end-December 2021, with five-year returns of 2.8% to the same date, according to WTW.

These compare with 3.1% and 2.6% for the annualised three and five-year returns, respectively, to end-September 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, the results for Q4 2021 were a combination of very strong equity returns – particularly from US equities – and low, or negative, returns from bonds.

Marques observed: “Given the very high Portuguese pension fund allocations to corporate and government bonds, the returns were relatively modest when compared with the double-digit returns observed in some equity markets.”

He said pension funds in other countries with higher average returns typically benefited not only from larger equity allocations, but also larger allocations to alternative assets, which also performed well during 2021.

“This asset class does not represent a material allocation in Portugal,” he said. “Portuguese pension funds also still have a moderate bias towards European equities, which did not perform as well as global equities.”

However, he said there has been a “slow but steady” reduction in the European equity bias.

According to Marques, both equity and corporate bond allocations are increasingly being put in place using environmental, social and governance (ESG) funds, as well as exchange-traded funds (ETFs).

At the end of December 2021, equities made up 21% of Portuguese pension fund portfolios, a slight increase 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 – 61% – was in debt, compared with 63% at end-December 2020, but just under half was still in direct holdings of government bonds. Real estate allocations were 11%, the same as last year.

Turning to risk management, Marques said more pension funds in Portugal have been integrating ESG considerations into portfolios as a tool to protect against climate and other ESG risks.

“However, we believe that there is still work to do in relation to engagement and impact investing,” he said.

Marques added: “More pension funds are hedging against interest rate risk and we expect even more to do so, now that interest rates are at a higher level.”

Funds are also hedging their inflation risks, he said, and there is more interest in index-linked government bonds to achieve this.

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