Impact of recent market turbulence on pensions

by Dr. Ros Altmann

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It has been a turbulent summer – unusually stormy weather and floods followed by financial market chaos.  All markets were hit by a sudden collapse in confidence and most investors will have seen the value of their funds fall.  What will this mean for your pension?

We need to view these few weeks in perspective.  Of course the headlines have been grim, but pension funds are long-term investments, so it is important to keep a cool head.  As the American mortgage market crisis spread fear throughout the global banking system, investors who which had bought some of these US mortgage loans (and had also borrowed heavily to speculate on the markets) were forced to raise cash to meet margin calls.  However, markets are notoriously thin during the Summer holiday season so financial asset prices (both equities and corporate bonds) were marked down sharply due to the lack of buyers.  Coupled with rumours of major financial groups being on the point of collapse, the markets seized up in panic and central banks were forced to intervene.  These were nervous times for investors.

What are the implications for your pension?

Anyone already drawing their pension should not be affected.  Once receiving your pension, either from a company scheme or from an annuity provider (unless it is an investment-linked annuity or income drawdown), the amount you get cannot be reduced.  Everyone with a public sector final salary pension should not be affected at all.

Company final salary scheme members also have much less to worry about, as employers shoulder the investment risk.  However, if the employer cannot afford to make up for market losses, he may close the scheme, which would normally mean lower pensions in future.

People with money purchase pensions, such as stakeholder, personal pensions or group personal pensions are more at risk – particularly if you are close to retirement.  Your pension fund could have fallen sharply since your last valuation, so check with your pension company or trustees before you decide to cash in and buy your pension annuity.  Most schemes are heavily invested in the stock market and may be better to wait a little while before actually drawing your pension.  Once investors return from their holidays, and it becomes clearer which particular companies have been badly hit by the US mortgage problems, investors can make better informed decisions.  It is now possible, for example, to take just the tax free lump sum from your pension fund, leaving the rest of your money invested and then buy an annuity later.  Of course, it is vital to get good independent financial advice before making any such decisions.  

Let’s hope the storms blow over, allowing long-term investors to put the recent turmoil in perspective.