The PensionsEurope Report 2022 – Trends and development in funded pensions analyses the recent developments in the occupational pensions landscape across Europe.The report is mainly based on the ECB quarterly data on the developments of assets and liabilities of euro area pension funds.
The analysis reveals that until the end of 2021, the assets of euro area pension funds continued growing more than their liabilities, increasing their aggregate funding ratio. A global increase in inflation kicked off in early 2021 and it has stayed very high until today. With rapidly increasing interest rates, the liabilities of pension funds have decreased more than their assets, thereby again improving the funding ratio.
As part of their long-term investing strategy, many pension funds are using passive investing, in which they buy and hold a diversified mix of assets in an effort to match, but not to beat, the index. The popularity of passive investment funds has been a growing trend over the last decade also amongst pension funds.
During 2008Q1-2022Q2, the holdings of investment fund shares by pension funds have increased from 23% of their all assets to 45.9%, direct investment in equities have relatively decreased from 21% to 9% of all assets. According to a rough estimation, all the direct and indirect holdings of public and private equity by euro area pension funds would be around 30% of their all assets.
Pension funds’ holdings of debt securities has varied from 23% to 32% of all. While defined benefit pension plans have been obliged to invest a certain amount of their assets in ‘safe assets’, many pension funds have also successfully searched for yield from corporate bonds. The holdings in real estate funds have been stable and have slightly increased over the past years.
The direct impact of inflation on pension funds varies across countries and different kinds of pension schemes (who bears the risk varies) and their various investment strategies. High inflation makes it, in general, more challenging to provide high pension benefits in real terms, both for DB and DC schemes.
PensionsEurope will publish its next annual statistical report at the end of 2023.
You can find the full report here.