The Irish Association of Pension Funds (IAPF) has moved to reassure the public about their pension funds, given the sustained weakness of global stock markets, stating there is no need for concern as pensions are a long-term investment.
"While recent events are a cause of concern, in the long term most funds need not be unduly concerned given the time horizon involved in providing for pensions" according to the IAPF.
It says the levels of stock market performance of the 1990s are not expected to be repeated and in the future returns of a more modest level can be anticipated.
In the current environment, it has advised trustees to maintain clear lines of communication with members and to provide an understanding of the longer-term objectives of the scheme and the specific strategies and assumptions that underpin the investments of the particular fund.
Global stock markets have fallen by between 20 per cent and 30 per cent since the beginning of the year. Much of the decline is because of corporate accounting concerns and the excesses associated with the bubble in technology, media and telecommunications stocks.
During this time, investments in bonds have provided some protection as a safe haven, while property returns have also been marginally positive over the first six months of 2002. The stock market declines follow poor investment returns in 2000 and 2001. Since 2000 world equity markets have fallen by between 40 per cent and 50 per cent.
The IAPF said this was significant in terms of both the magnitude of the declines and the length of time markets have been falling. The fall in 1987 was also severe but relatively short-lived compared to the current prolonged weakness.
Given that the majority of Irish pension funds have significant exposure to the fortunes of the equity markets, this will have resulted in a fairly significant fall in the value of pension fund assets across the industry as a whole.
The IAPF estimates that some 64 per cent of Irish pension funds are invested in equities, 22 per cent in bonds, 7 per cent in property and 5 per cent in cash.
"While this allocation will have changed over time, the spread of assets means that many pension funds have not been as severely hit as might be expected from the headline equity falls," according to the association.
The sharp fall in equity prices has had an impact on the past three years, but over longer time periods it points out that managed funds have kept well ahead of domestic price inflation.
"While we are not, in any way, trying to trivialise the falls that have occurred, they should be viewed in the context of the returns achieved in the last 10 years," it says.
To deliver a reasonable standard of living in retirement for their members, pension funds need to achieve investment returns that exceed the inflation rate. Equity and property investments are particularly important assets in this regard, as they both have a strong link to the underlying inflation rate and are an important component in a managed fund.
The current equities slump is unlikely to have any impact on members of defined-benefit schemes, as the investment risk is usually carried by the sponsoring employer. In defined-contribution schemes it is the member who carries this risk.
The IAPF suggests that many funds will have achieved strong investment gains in the 1990s, which should help to cushion the recent blows.
