Coronavirus outbreak puts pressure on returns

Updated April 1, 2020

The financial markets have taken a dive in the wake of the coronavirus outbreak that is causing more and more countries to take more and more drastic measures in an attempt to contain the spread, which has locked down major parts of the economy.

Even though the markets have stabilised a bit in recent days, global equity markets have lost almost 25% since end-2019. Corporate bonds have suffered major losses as well.

While equity markets have sustained massive losses, the impact on PensionDanmark’s returns is less severe. This is because PensionDanmark invests in a wide range of assets. A diversified portfolio is more resilient and better able to deal with different economic environments.

Claus Stampe, CIO of PensionDanmark:

“At PensionDanmark, our primary focus is to build a well-diversified portfolio with an attractive risk-return profile and good down side protection. At the same time, as members approach retirement age their investment risk and allocation to especially equities are gradually reduced. Overall, this means that PensionDanmark has escaped relatively unscathed from the past few weeks’ turmoil”.

For members up to 45 years, the year-to-date return as of Marts 31 is a negative 12%, while those older than 45 years, who have a smaller proportion of their savings invested in equites, have lost less. For a 67-year-old member, the year-to-date return is a negative 8% . By way of comparison, the return for 2019 was 16.1% for members up to 45 years and 9.0% for a typical 67-year-old member.

If you are more than 10-12 years away from retiring, you have no reason to fear that the current market turmoil will have a significant effect on your pension benefits. It is important to bear in mind that equity markets tend to rally after a period of heavy losses, and if you are not about to retire, you will have plenty of years to recoup this year’s losses. The many rescue packages launched by authorities and central banks across the world in an effort to help the hardest hit businesses and employees ride out the crisis reduce the risk that the economic lockdown will cause severe and permanent damage to the economy.

If you are nearing retirement age or have already retired, you will have suffered smaller losses this year than younger members with a longer investment horizon. Unfortunately, this does not change the fact that the market fall may have an adverse impact on your pension benefits. Retired PensionDanmark members typically receive both life-long retirement pension benefits and annuity pension benefits.

  • Annuity pension benefits are usually fixed for one calendar year at a time. If the investment return for 2020 as a whole is negative, annuity pension benefits will have to be reduced. Based on the current investment return, we would have to lower your annuity pension benefits for 2021 by about 6-10%.
  • As for life-long retirement pension benefits, our procedure is to set aside an amount when you retire that we can draw on in years of poor returns. Therefore, even in a situation such as the one we are experiencing now, there is a very limited risk that we will have to reduce your life-long retirement benefits. Right now, the most likely scenario is that we will be able to maintain current life-long retirement pension benefit levels in 2021.

Read more: How we invest your savings