How did the financial markets perform?
Equities
While equity markets around the world showed a mixed picture, equity prices declined in all regions in the quarter under review. Nevertheless, a good spread across regions is as important as it has ever been. Emerging market equities showed relatively the best performance (-6%). US equities delivered the poorest returns (-11%), partly due to the depreciation of the euro against the US dollar.
Bonds
The bond markets were also in for a shock as central banks raised their policy rates. Bond prices move in the opposite direction of interest rates. The longer a bond’s term, the more sensitive it is. That is why this move particularly affected long-term government bonds.
Negative returns and a.s.r. investment profiles
We increase the share of government bond investments as the retirement date approaches in order to reduce the investment risk. However, government bonds also serve another purpose: hedging the interest rate risk. We aim to fully hedge the interest rate risk in the year preceding the retirement date. In other words, the investments at that time should be as sensitive to interest rate movements as our fee for the purchase of pension benefits. As a result, your pension capital (which may increase or decrease in value as a result of interest rate movements) should be able to buy you the same amount of pension as before those interest rate movements. The fee to be paid for the purchase of a pension is highly susceptible to rate changes. We do not want the amount of pension to be purchased to be overly dependent on interest rate fluctuations right before the retirement date.
This year (as well as last year) market interest rates went up. This is bad for long-term bond prices and therefore also for the amount of pension capital. The other side of the coin, however, is that rising interest rates have a favourable effect on the fee for the pension to be purchased. This year, for example, pension fees became 19%-20% more favourable. We have calculated over previous years whether our hedging of the interest rate risk was indeed effective, and it was. Our commitment to delivering positive returns on investment will of course be as strong as ever, but in addition we also consider the interest rate risk. This risk has a major influence on the eventual amount of pension.