Developed Nations’ Public Pension Plans Dropped By Average of 15% in 2022

How bad was 2022’s market slide that hurt pension public pension plans in developed nations? Bad: They showed losses of about 15% on average, according to figures from an annual study by the Organization for Economic Co-operation and Development.

The arrival of higher interest rates and inflation, as the world struggled out of the COVID-19 pandemic, led to significant losses in asset values in OECD countries, the report showed.

Losses ranged from 21% in the U.K. and 18% in the Netherlands to 9% in Germany. U.S. retirement plans were down 18%. Pension plan returns this year are positive, given the stock market’s recovery (the S&P 500 lost 19% in 2022 and is up a comparable amount in 2023 thus far), although muted overall: The Equable Institute research group projects that U.S. state and local plans will advance 5.3% on average this year.

The OECD’s “Pension Markets in Focus 2023” paper outlined how the “rise in interest rates led to widespread investment losses for asset-backed pension systems” resulting from “the simultaneous fall in bond and equity prices in 2022.”

The best that can be said of this spell of investment losses is that previous years’ gains helped “compensate for the losses over the longer term,” the study noted. “Pension plans reached an average annual return above inflation in 21 out of 55 reporting jurisdictions,” the report maintained, counting OECD nations (36 members) and others.

The undoing of asset valuations last year is by now well-known: Rising rates pummeled bond prices and also slammed equity values, which had been buoyed by very low borrowing costs, the report recounted.

The U.K., along with the Netherlands and several other European nations, suffered the most due to the way their pension plans are structured, the report found. British and Dutch plans, in particular, “suffered losses on their interest-rate derivatives held to hedge against the risk of declining interest rates.” Also, “Dutch pension funds also recorded losses on their real estate investments.”

The impact on U.S. funds was partly offset by the dollar’s strength, the report observed: “The rapid rise in interest rates in the United States made U.S. dollars attractive to investors, who sold other currencies to purchase them.” Of course, the greenback has long been a refuge currency in troubled times.

One consequence of the 2022 drawdown was that many plans reduced their exposure to equities. Part of that stemmed from last year’s plummet in stock markets worldwide, but, going forward, the study concluded, there has been a widespread “decision to move away from equities in a global context of uncertainty with high inflation, volatility in equity markets and fears of recession.”