Growth pension fund assets smaller then pension fund liabilities

Statistical News Release
Date 10 June 2015

In the first quarter of 2015, pension funds' investment portfolios grew by EUR 116 billion to a total of EUR 1,250 billion. This growth however was insufficient to compensate for the rise of the pension fund liabilities (+EUR 168 billion).

Figure 1 -Pension funds' investment portfolios
(in EUR billion)

Pension funds' investment portfolios

The positive investment returns achieved by the pension funds in the first quarter are a main driver of ths value increase of the assets. For the sector as a whole, investment returns amounted to approximately 10.2%, with returns on equities and fixed-income securities reaching 12.7% and 10.5%, respectively.

As a result of the ECB's policy of monthly purchases of European fixed-income paper amounting to EUR 60 billion, capital market interest rates fell while the value of the fixed-income securities portfolio went up. At the end of the first quarter, this portfolio (worth EUR 724 billion) represented about 58% of total investments. The share of fixed-income securities in the total investment portfolio has been on the rise since the third quarter of 2014. Before that period it hovered around 53% for some quarters.

Interest rate derivatives are an important component of the fixed-income securities portfolio, and partly contribute to hedging interest rate risks for pension funds. Net worth of these interest rate derivatives grew by EUR 29 billion to EUR 99 billion in the first quarter.

Figure 2 -Pension fund derivatives portfolios
(in EUR billion)

Pension fund derivatives portfolios

Through the fixed-income securities portfolio, declining capital market rates usually have a positive effect on pension funds' claims. On the other hand, it causes the funds' liabilities to rise, as these are discounted using a rate derived from the capital market interest rate: the current interest rate term structure. From a balance sheet management perspective, the fixed-income securities portfolio helps to offset this rise. As liabilities are interest-sensitive and pension funds generally do not fully hedge interest rate risk, the rise in liabilities exceeded the increase in claims. As a consequence, pension funds saw their own funds and funding ratios decline.

When interest rates rise, the opposite occurs. In that case, the value of the fixed-income securities portfolio would fall, as would the liabilities. The funding ratio of those pension funds that have hedged their interest rate risk would therefore not change significantly. Pension funds that have not hedged this risk, on the other hand, would see their funding ratio improve.

The fall in European capital market rates simultaneously led to an appreciation of the main foreign currencies relative to the euro. As a result, investments in equities denominated in foreign currency increased in value. On the whole, at the end of the first quarter, pension funds' investments in securities denominated in foreign currency amounted to EUR 636 billion. Approximately two thirds (EUR 399 billion) concerned investments denominated in USD. Pension funds use currency derivatives to hedge the risk of falling exchange rates. Because the first quarter saw a rise in exchange rates, net worth of currency derivatives fell from EUR (10) billion to EUR (29) billion.