Financial Markets in 2022 and Their Impact on (Pension Savings) Funds
27 October 2022 - 7 min Reading time
In these exceptional times, characterized by geopolitical, economic, monetary, and climate-related challenges, it is crucial to remain rational and not succumb to emotions and/or fear.
Therefore, BEAMA puts forward the following recommendations:
- Those who can afford it should continue to invest periodically and diversify their investments, including in funds.
- Time, especially the long term, is an investor's friend.
- Starting pension savings as early as possible is essential to maintain wealth after retirement and fully benefit from the power of compounding. If possible, gradually add other funds to your individual portfolio.
- Financial education remains important
Current Financial Markets
These are exceptional times for investors, partly due to the ongoing Ukraine-Russia conflict and supply chain issues, which have kept energy and commodity prices high. Additionally, Europe's current sustainability commitments are directing us toward more expensive/alternative forms of energy/electricity generation.
These factors contribute to the exceptionally high inflation we are currently experiencing. As a result of persistent high inflation and concerns about a recession, the prices of most global stocks are visibly declining.
In response to high inflation, central bankers are steadily raising interest rates, which has a counterproductive effect on economic growth and the valuation of bonds (which lose value as interest rates rise) and stocks (especially growth stocks). We are currently in a situation of positive correlation between bond and stock price movements.
In normal circumstances, the movements of bonds and stocks are negatively correlated. When one of these types of financial instruments records losses, the other type often registers gains, thereby dampening the overall effect.
There are also several signs indicating that the Covid-19 pandemic is not yet fully under control.
The result of these geopolitical, climate-related, economic, monetary, humanitarian, and other issues is that there is currently a very high level of uncertainty surrounding the global economy. Financial markets do not thrive in uncertainty, and this has already led to significant volatility
Exceptional financial times require us to remain rational and keep a cool head. Asset managers guide investors through these volatile times.
Impact on Pension Savings Funds
Many investors have seen the value of their investments decline significantly in recent months, including the 1.78 million Belgians who engage in pension savings through a pension savings fund. The average return of pension savings funds for the first six months of 2022 is -15.3%.
This represents a significant negative value correction. However, in the context of third-pillar pension savings funds, BEAMA highlights the following points:
Pension savings is a long-term product, so pension savers should not focus too stubbornly on short-term returns, which can be quite variable.
Over longer periods (≥ 10 years), pension savings funds, on average, comfortably outperform inflation.
The European Union's long-term inflation target is around 2%.
- Pension savings funds do not have a mandatory exit point. If you reach the retirement age but do not immediately need the accumulated capital, you can leave it (partially) untouched until financial markets recover and a more opportune exit point emerges.
- Spreading the annual investment in a pension savings fund across the year through partial contributions helps avoid investing at the "most expensive" moment in that year. About 4/5 of pension savers already follow this approach by subscribing through systematic (monthly) deposits.
- Pension savings funds offer annual tax deductions in personal income tax.
In 2021, 3/4 of subscriptions were eligible for a 30% tax deduction (maximum deposit of 990 EUR), and 1/4 were eligible for a 25% tax deduction (maximum deposit of 1,270 EUR).
In 2021, there were subscriptions totaling 1.078 billion EUR eligible for tax reduction. Additionally, there were also subscriptions associated with switching to another pension savings fund.
In 2021, subscriptions eligible for tax deductions amounted to 1.078 billion EUR, and there were also subscriptions related to switching to another pension savings fund.
- The return of pension savings funds is determined by the performance of the underlying assets in which the fund is invested. Pension savings funds are mixed funds with a broad diversification of investments in bonds and stocks. The units of the pension savings fund always remain the property of the investor in the context of individual supplementary pension savings.
- It is advisable to start pension savings as early as possible in one's career. The earlier you invest in a pension savings fund, the more years you can benefit from compounding (interest on interest).
- Even with a modest amount, individuals can start monthly pension savings. Both the amount and frequency can be chosen by the investor.
- Most management companies of third-pillar pension savings funds manage multiple types of pension savings funds that can cater to the risk sensitivity combined with the investment horizon of the individual pension saver. In the market, there are "defensive," "neutral," and "dynamic" third-pillar pension savings funds.
- Pension savings funds provide transparency in all aspects, with full information available from subscription and throughout the life cycle.
- Like all funds, pension savings funds are regulated by the supervisory authority, the FSMA (Financial Services and Markets Authority).
According to BEAMA, individual pension savings are crucial to maintaining prosperity after retirement and addressing the aging population issue.
Generalization to All Types of Funds
The above observations for pension savers naturally apply to investors in other types of funds as well. They too often have to contend with noticeable negative returns during the first half of 2022.
However, it is important to remain rational and not get carried away by emotions and fear. Therefore, BEAMA puts forward the following recommendations:
- Those who maintain financial capacity are best served by investing periodically and diversifying their investments. Funds are an ideal investment instrument in this regard.
- Evaluate investments over the long term because time is an investor's friend.
- Start pension savings as early as possible, and subsequently, supplement your individual portfolio with other funds (active – passive, bonds - stocks – mixed, etc.). The earlier you start investing, the more you can benefit from the power of compounding (interest on interest).
- Often, you can start an investment plan in funds with a modest amount.
- Investors should continually strive to enhance their financial education. The entire financial sector regularly presents various initiatives in this regard.
