How did the financial markets perform?
The reasons for negative investment performance are still the same: geopolitical tensions, rising interest rates and rising inflation. These are still the ingredients of a toxic economic cocktail with an uncertain outcome.
Exceptional situation
Nearly all asset classes returned a 15% loss in 2022 to date. Losses of this magnitude are exceptional not just for equities, but especially so for bonds. The fact that both equities and bonds are equally trading in red territory is even more rare. Of all asset classes, US equities performed least poorly this year. This is entirely due to the appreciation of the US dollar. Measured in dollars, US equities actually lagged behind European equities.
Negative returns and a.s.r. investment profiles
This year (as well as last year) market interest rates went up. That is bad news for bond prices and pension capital levels, especially right before retirement. Bond prices and interest rates move in opposite directions, and the longer a bond’s term to maturity, the more sensitive its price will be to interest rate movements. Within the investment profiles, we increase our bond investments (which have a long term to maturity) as the retirement date approaches in order to reduce the investment risk.
But long-term bonds also have the effect of 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. Hedging this risk decreases the final pension amount’s sensitivity to interest rate movements shortly before the retirement date.
Although the investments fell in value this year, the pricing of the pension to be purchased improved by 29% due to rising interest rates. Importantly, therefore, not just the level of pension capital should be considered, but also the pension amount that can be purchased with this capital on the retirement date. 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.