It's easy to forget the long term effects of market volatility when cocooned in a sea of green and red figures flashing across a computer screen. The M&G Bond Vigilantes, always worth listening to even in calmer times, posted a message today that made us stop and think what the fallout of the past few weeks will be on pensioners in the coming years.
They pointed out that pension scheme Trustees must be wondering where to turn next. 2008 was their nadir when pension schemes saw millions wiped off the value of their funds as equities plummeted, bringing to a head years of over expenditure and under-funding. In 2009 and 2010 they were provided with light relief as the eventual rally helped to alleviate some of the huge deficits which had originally grabbed the attention of worried members.
Unfortunately, 2011 has thrown them back into disarray and they are stuck in a vicious cycle. The funding deficits facing many final salary pension schemes can only be reduced by a significant rise in the underlying fund value. A rise of this sort will naturally wipe out some of the deficit, even without the other measures taken up by the Trustees. The asset classes best suited to generate higher gains over a longer period of time are equities, but they bring higher risk with them. It is the risk of market falls which compound the original problem.
In 2008 many pension schemes were heavily exposed to equities and although they tried to manoeuvre into alternative, supposedly less risky asset classes, the damage had been done.
As we reflect today, equities have fallen and gilt yields have also dropped, a frightful combination if you are running a pension fund. Equities should rise and gilts should start to reward investors for holding Sovereign debt again in the future, but none of that really helps the thousands of people reliant on Trustees to manage their pension funds on their behalf to fund retirement. If Gilt yields remain low, where can Trustees turn to produce the stable, regular income streams necessary to pay the ever-increasing numbers of pensioners every year?
Governments can support final salary pension schemes to a point, but they are not exactly rolling in cash to prop them up further.
Everyone in a final salary pension fund should be asking their Trustees how the fund has performed, how well it is being funded and will the fund sustain the retirement they had planned on. Hopefully the answer will be yes, but it goes to show that sometimes the consequences we are blind to today, will be the problems of tomorrow.
Tags: market volatility, M&G, pension, equities, Trustees, gilts