High returns globally in both equity and fixed income markets helped Portugal’s pension funds to an average 8.2% gain for the 12 months to 31 December 2019, according to Willis Towers Watson (WTW).

The return compared with a 3.1% loss for the 2018 calendar year, when equity markets made negative returns. The Q4 2019 return was 1.2% compared with 1.4% for Q3.

However, most gains were made in the first quarter of the year, when pension funds returned 4%.

“Over 2019, equity returns were very high across the globe, with most equity markets returning between 20% and 30%,” said José Marques, director of retirement at WTW.

This was also true for bonds, he continued: “Interest rates fell significantly across virtually all geographies, pushing corporate and government bonds returns to very positive levels. The longer the duration of the bond portfolio, the higher the return in 2019.”

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

Marques said that although returns were very positive across most regions and asset classes, returns on US and European equities, as well as European bonds, were the main reasons for the high returns of the Portuguese pension fund market.

Some other notable performances, albeit with very limited impact on Portuguese pension funds, came from Irish equities and crude oil, with 40% and 37% returns over 2019, respectively.

The 2019 return compares with average returns of 3.7% over the previous 15 years.

It brought annualised returns for the three years to 31 December 2019 to 2.7%, and for the five years to December-end to 2.3%.

However, the first quarter of 2020 has been in stark contrast to 2019. Following the ravages of COVID-19, equity markets have suffered material losses, with most markets down between 20% and 40% since the beginning of the year.

“On the other hand, with investors also moving away from corporate bonds, European corporate bond yields rose in March, which means that the theoretical value of liabilities has fallen,” Marques said. “So both asset values and theoretical liabilities will have fallen for Portuguese pension funds.”

He said that with both assets and liabilities moving in the opposite direction of 2019, some pension plans would see their funding levels improve, whilst others would experience falls.

“We expect most pension plans to have been negatively impacted on their funding position”

José Marques, director of retirement at Willis Towers Watson

“But as things stand at present, we expect most pension plans to have been negatively impacted on their funding position,” he said.

However, WTW expects the Portuguese pension fund market to be one of the least affected by the severe falls experienced across all asset classes.

Marques said: “This is firstly because it has a relatively low allocation to equities compared with other countries, and secondly because the average duration of corporate bond portfolios is also relatively low, so they are not affected as negatively by increases in yields.”

At the end of December 2019, debt had increased slightly over the past year to 64% of Portuguese pension fund portfolios, including direct and indirect holdings, according to data from regulator ASF and from the Association of Investment Funds, Pension Funds and Asset Management.

Equities made up 18% and real estate 12% of portfolios at that date. Meanwhile, environmental, social and governance (ESG) investing is growing in importance.

“Almost all pension funds we had discussions with about investment strategy in 2019 were either interested, or were proactively requesting ESG to be factored in their investment process,” Marques said.

“There is still a lot of work to do in this area, but no doubt it is a trend that will not stop. We expect a lot of both voluntary and regulation driven activity in this area over the next few years.”