Inflation hedging and properties were bright spots in a challenging Q1 2022

Inflation hedging and PFA’s large property portfolio have helped limit the losses in the first quarter of the year, where a war in Ukraine, an energy crisis, high inflation and rising interest rates have challenged the financial markets

The first three months of 2022 developed in a direction that only the fewest had expected. Instead of a strong economic rebound following the corona pandemic, optimism quickly gave way to the war in Ukraine which, besides the human tragedy, also impacted the mood in the financial markets. At the same time, rising inflation, a developing energy crisis and rising interest rates have been a bad cocktail, particularly for the equity and bond markets.

“It has been a difficult start to the year, as it has been made clear that we are faced with a changing world. This applies both to the broad-based price increases and the financial markets, which are developing differently and more unpredictably than we have been used to in recent years. However, we have seen more positive signs, particularly in the equity markets, towards the end of the quarter and this makes us feel slightly optimistic,” says Kasper A. Lorenzen, Group CIO at PFA.

Customers with PFA Plus have seen limited negative returns as the financial markets have recovered somewhat at the end of the quarter after a very turbulent start to the year. The returns from PFA Plus are between -1.6 to -4.0 per cent. Overall returns from the market rate environment are at -3.3 per cent. Here, PFA is among the best-performing pension companies in this difficult market.

“With our robust portfolio, we have been able to limit the losses and take early precautionary measures in response to the growing inflationary pressure. Among other things, this means that customers with our recommended profile C in PFA Plus have seen negative returns of -3.3 per cent, which is limited, considering the major fluctuations in the first quarter. And even though it is never fun to see negative returns even for a short period, they should be viewed in the context of customers with the same risk profile generating a whole 15.3 per cent in returns last year and us just having been through a period of very high returns,” says Kasper A. Lorenzen.

Inflation hedging and properties have a positive impact on the returns

Already in 2021, PFA began to buy inflation-linked bonds which have increased in value as inflation went up, and this has had a positive impact on returns. In addition, PFA’s customers have been served well by the broad portfolio of unlisted investments that has been built up over a number of years. These are investments that are typically less sensitive to business cycles and thus they help to protect savings during periods of market unrest.

“At PFA, for many years we have been focused on creating a broad portfolio of unlisted investments that can supplement the returns from equities and bonds and diversify risk. Our customers have benefitted from this in the first quarter where, for example, our large property portfolio of over 75 billion Danish kroner has contributed with positive returns of 3.6 per cent, while our alternative investments have performed relatively well with only a minimal negative return of 0.2 per cent. Finally, these are also investments that offer some protection against the future we are facing with higher inflation and thus more demand for a tighter monetary policy,” says Kasper A. Lorenzen. 

All in all, the investment returns at a group level are DKK -27.3 billion in the first quarter, or -4.3 per cent. This negative return is, among other things, driven by a return of DKK -13.7 billion in PFA’s average interest rate environment, or -7.2 per cent, and this is mainly due to the rising interest rates. However, this development also means that the life insurance obligations have decreased and that the surplus funds for average interest rate environment customers have thus increased. The development will therefore not impact the interest that PFA’s customers in the average interest rate environment have prospects of receiving.

Climate considerations will once again carry great weight on the global economic agenda

PFA’s extra climate-friendly savings solution, PFA Climate Plus, has been relatively harder hit by the unrest in the financial markets. This is because PFA Climate Plus is a more concentrated portfolio and thus, the short-term fluctuations will typically be larger than those in PFA Plus. We also saw this in the first quarter where, among other things, the absence of oil and gas companies have had a negative impact on the returns as the shares of these companies increased due to the rising energy prices.

“In the long run, climate considerations will carry great weight on the global economic agenda. Thus, climate-friendly assets will most likely also increase in value due to the war in Ukraine which has so clearly shown that climate and energy policies are inseparable from security policy. At PFA, we will therefore continue to work in a systematic manner with supporting and investing in the green transition both with PFA Climate Plus and the rest of the portfolio,” says Kasper A. Lorenzen.

PFA has no shares or government bonds in Russia

PFA had no shares or government bonds in Russia when the war broke out, and PFA’s exposure to Russia has therefore been very limited. From an investment point of view, the concern is therefore mostly about what consequences the war in Ukraine will have on the world economy in general in the slightly longer run.

“One thing is what is happening to the Russian economy, which has almost collapsed. However, what is worse is the impact the war has had on things such as energy prices and the general uncertainty created by a war in general. A lot depends on how long the war lasts and what impact sanctions will have on supply chains and production and how the situation is managed from a financial and monetary policy perspective. It is a fragile situation, and therefore we can only hope that the acts of war stop as soon as possible - not least due to the many people that are directly impacted by the violent acts of war,” says Kasper A. Lorenzen.

With approximately DKK 625 billion in customer funds, PFA is Denmark’s largest commercial pension company and among the largest in Europe. PFA has more than 1.3 million customers and 6,000 corporate and organisational customers. The core of PFA’s business model is a financial community with our customers, meaning that the major part of the value that is created is returned to our customers. This is done via CustomerCapital, which is PFA Pension’s model for sharing profits and risks. PFA supports the Paris Agreement’s climate targets, contributes actively towards meeting the UN’s Sustainable Development Goals and invests billions in the green transition. As an active owner, PFA wants to influence companies to pursue a positive development path that benefits both people and the environment. 

Additional information
Oliver William Gunner, Head of Media Relations, (+45) 28 56 23 22 / 

Investment return per asset group, Q1 2022
AssetsQ1 2022
Listed shares(6.3)%
Alternative investments(0.2)%
Returns in PFA Plus, Q1 2022
Years to retirement30155-5
Profile D - high risk(4.0)%(4.0)%(2.6)%(2.4)%
Profile C - moderate risk(3.3)%(3.3)%(2.3)%(2.1)%
Profile B - low risk(2.7)% (-2.7)% (2.0)% (1.9)%
Profile A - very low risk(2.0)%(2.0)%(1.7)%(1.6)%

The return includes 5 per cent in Individual CustomerCapital and a return for Individual CustomerCapital of 8 per cent per year.

Returns in PFA Climate Plus, Q1 2022
Years to retirement30155-5
Profile D - high risk(8.0)%(8.0)%(5.0)%(4.4)%
Profile C - moderate risk  (6.5)%(6.5)%(4.3)%(3.8)%
Profile B - low risk(5.0)%(5.0)%(3.6)%(3.2)%
Profile A - very low risk(3.5)%(3.5)%(2.9)%(2.6)%

The return includes 5 per cent in Individual CustomerCapital and a return for Individual CustomerCapital of 8 per cent per year.

Returns in PFA Invest, Q1 2022
PFA Invest Balance AA  (4.5)%
PFA Invest Balance A  (4.6)%
PFA Invest Balance B  (5.0)%
PFA Invest Balance C  (5.2)%
PFA Invest Balance AKK  (5.0)%