Pension-fund members should not be worried about the impact of current market volatility on the value of their pension funds, according to fund managers. Although falls on equity markets have reduced the value of pension funds, they point out that pension funds are long-term investments with the ability to ride out short-term market volatility.
Over any reasonable time period, investments in equities have provided the best returns for pension funds, according to Mr Eugene Kiernan from Irish Life. "Pension funds can take a longer term perspective and are not distracted by short-term market movements," he said. About 70 per cent of most pension fund assets would be invested in equities, he said.
AIB Investment Managers (AIBIM) head of pensions marketing Mr Tony Gargan agreed that pension funds were generally biased towards equities because they produced the best returns over time. A typical pension fund was a long-term investment and the assets held reflected this long-term strategy, he said.
About 73 per cent to 75 per cent of AIBIM pension funds would be invested in equities at the moment, he said. This proportion could rise or fall depending on the fund managers' medium-term view of the market.
While pension funds have been affected by the falls in markets in recent days, in general their losses are likely to be less than many other types of investment fund because of their cautious investment strategy.
Eagle Star investment director Ms Ann Powell said pension funds were not invested in dot.coms but were invested in some well-managed technology companies which had now suffered with the rest of the market.
In their investment strategy, pension fund managers generally took a medium to long-term view in buying equities, Mr Gargan said. There were two main risks in buying shares - stock-specific risk and market risk, he explained. Stock-specific risk arises when most or all of your cash is invested in one stock or sector. This risk can be avoided by adequate diversification through investing over industries, sectors and countries. Market risk arises out of a fall across the market. While it affects the paper value of a fund, it would impact on the actual value only if the shares had to be sold at the wrong time.
To protect against volatility in buying shares, AIBIM looks for large capitalisation stocks to ensure liquidity - companies that are leaders in their sectors, companies producing earnings per share in excess of their own sector and the overall market, according to Mr Gargan.
Asked whether AIBIM pension funds had invested in dot.coms, Mr Gargan said they had not. His funds always looked for demonstrable earnings per share growth which most dot.coms could not provide. "We believed that stocks with no demonstrable earnings per share growth were not sufficiently robust to have pension fund assets invested in them. The risk was too great."
However, it is clear from the weight of money that went into dot.coms that some pension funds in the US were invested in them.
The outlook for pension fund members retiring now varies depending on the type of scheme they are in. Employees in a defined benefit scheme would not be affected because their benefit, often two-thirds of final salary, is guaranteed by the fund. Employees in defined contribution plans - where the contributions made by the employees and their employers, together with the performance of the fund, will determine the pension the employee will receive - could be affected.