Executive summary

This edition of Pension Markets in Focus examines the effect that elevated inflation, rising interest rates and strong labour markets had on asset-backed pension systems in 2022. It focuses on the impact on investment performance, portfolio allocation, contributions and the evolution of assets earmarked for retirement.

Higher interest rates and falling equity valuations led to widespread investment losses in 2022

The simultaneous fall in bond and equity prices, the two main instruments in portfolios earmarked for retirement, led to widespread nominal investment losses. High inflation rates exacerbated these dynamics, with negative real rates of return observed in most countries. The strong valuation gains achieved in previous years cushioned the impact of these negative rates of return on the long-term investment performance of asset-backed pension systems.

Higher employment rates and nominal wages contributed to a rise in the number of people participating in pension plans and in contributions

Employment rates improved in 2022, with a consequent increase in the proportion of the working-age population covered by a pension plan. This is particularly visible for pension plans that mandate workers’ participation. In combination with rising nominal wages, this increase contributed to an overall rise in nominal contributions to pension plans in most jurisdictions. At the same time, in voluntary systems, high inflation may have reduced the ability of some individuals to save for retirement.

Investment losses led to a decline in the value of assets earmarked for retirement in most OECD countries, whereas in several non-OECD jurisdictions this was offset by the surplus of contributions over benefit payments

The positive impact of higher contributions was insufficient to offset the negative impact of investment losses in many OECD countries, leading to a decline in the value of assets earmarked for retirement. However, in several non-OECD jurisdictions, the surplus of contributions over benefit payments offset investment losses, primarily driven by the fact that benefits are still low in many of these jurisdictions where the pay-out phase has not yet, or very recently, started.

The increase in interest rates led to an improvement in the sustainability of defined benefit pension plans in some countries, despite asset valuation decreases

The increase in interest rates has translated into higher discount rates used to calculate the liabilities of defined benefit pension plans, leading to a reduction in the present value of these liabilities. In some countries, the value of liabilities fell more than that of assets, resulting in an improvement in the sustainability of the benefit promise. However, jurisdictions that value liabilities using a fixed discount rate saw a deterioration of the ratio of assets over liabilities.

The effect of developments in 2022 on fees varied depending on the fee structure

Pension providers charge fees to members of defined contribution pension plans to cover the costs of the services they offer. Fees may be levied on contributions, assets or investment performance. The amount of fees collected on contributions generally increases in line with contributions. Fees on assets tend to evolve with the value of assets. The low investment performance in 2022 led to a decline in performance fees.