What does the condition of capital markets mean for pension plan participants?

2022 was the worst year for capital markets in 15 years. What does this mean for pension plan participants?

In one of the first sentences of the 2022 Summary Report by the Chamber of Fund and Asset Management (IZFiA), we come across this sentence - "2022 was the worst year in capital markets since the 2008 global financial crisis." This sums up what happened in virtually all global capital markets, including Poland. But what does it mean in practice, and how should these negative events be analyzed from the perspective of our pension plans - PPK and PPE?

In describing 2022, let's focus on a few issues that are relevant to our retirement savings:

  • First of all, 2022 was a "year of losses."

Virtually all core asset classes made losses, and what is a rare event, both those who invested in stocks and those who chose safer bond funds lost at the same time. In Poland, all stock market indexes "were red" at the end of last year. The main index of the Warsaw trading floor WIG lost: -17%, while the sWIG80 index fared slightly better at -13%. However, the mWIG40 and WIG20 indices lost the most, with both seeing declines of about 21%. During the entire past year, losses of Polish funds investing in bonds were not uncommon with some being double-digit. Fortunately, the recovery in the last quarter of the year allowed them to make up for some of their losses. As a result, most debt funds ended the year with single-digit losses. However, out of a total of 800 "retail" funds (both equity and debt), only about 130 earned a positive return in 2023.

  • In virtually all European countries, investors withdrew their money from funds.

Superimposing investment losses, European fund assets fell from just under €22 trillion in 2021 to €19 trillion in 2022. This 12.8% decline essentially mirrored the decline seen in Polish fund assets, which fell 13%.

  • On the other hand, not much has changed in the way Poles have been saving.

We are a nation of "cautious" investors, and if we already entrust our savings to investment funds we usually choose funds with lower risk and generally defensive investment strategies. In Poland, stock funds in 2022 accounted for only 11% of assets, while in Europe this ratio averaged 31%, and in Sweden and Romania as much as 60%!. More importantly and very often emphasized, for years the most important type of investment in Poland has been bank deposits - they accounted for 56% of all Polish household savings in 2022. The market crisis in 2022 has changed little in this picture.

And how should a pension plan saver (long-term investor) look at this situation?

For those who will be saving in these plans for at least a few more years, we can remind you of one of the most obvious and universal "stock market" laws - if prices are falling in the stock market they are bound to start rising at some point. Of course, this is a gross oversimplification. After all, the declines in stock markets, or losses on bond investments, had a number of systemic causes, and many of them are still having an impact. The war in Ukraine still continues, many economies are bearing the heavy costs of fighting inflation, there are still some companies facing high energy costs as well as problems with ensuring liquid supplies. And it is clear that the "bills" for the budgetary support of the crisis caused by Covid-19 will still need to be paid in the years to come. Nevertheless, the market has clearly changed in 2023. To what extent this change is permanent is difficult to predict, but what can already be said with certainty is that those investing in PPK, PPE, IKE, IKZE and other long-term investment products must have noticed these positive changes in their accounts. And finally, it is worth recalling one of the basic principles of economics, which says that every economy (and by extension the stock market and the capital market more broadly) experience cycles. After a number of years which have seen economic weakness, we are now in a period of increases relative stability.