Recent turbulence in the stock markets has panicked many investors contributing to pensions funds. The stock market falls of the past three weeks have left countless investors worrying about the state of their funds and wondering if their future returns will be affected. Some are even switching funds from equities to cash. A rash move by many, and one that may have been made too soon.
With such high growth levels being experienced in the three years previous, a market correction was somewhat inevitable. It was also necessary in order to weed out the less profitable investment funds from the more established investors. For the last couple of years, Irish pension funds had grown at a rate of over 16% per annum. Growth at this rate was not sustainable, yet despite the falls of recent weeks, most pension funds are still looking healthy.
Reasons behind the buoyancy of the pensions schemes include strong equities markets in 2006 leading into 2007 and continuous increases in interest rates. Higher interest rates lead to better returns from investments such as bonds, which pensions invest in proportionately. Differences between the assets and liabilities of funds have been significantly bridged as a result of these increased interest rates and have considerably reduced the pension deficits of many major plcs.
It would thus appear, that pensions funds will emerge relatively unscathed from the current market dips. Pensions are also long term investments and should be treated as such. Greater losses will be made in the long term if such things as three week falls in markets, cause mass exodus from these schemes.