A look at stock market history may give hope to investors but with most pension fund assets tied up in equities, the current slump is affecting these funds' values badly, writes Una McCaffreyCould this particular market cycle be the one that leaves us broke and kills off any hope of acomfortable retirement?

At times like these a refined sense of déjà-vu could be an investor's best friend. As the world of the capital markets seems to be collapsing, a realisation that they have been here, or at least somewhere similar, before could be a saviour for investors. After all, if they believe it is a one-off and it is downhill from here, they will be feeling mighty blue.

While hardly jumping for joy as markets take another swipe at finding their absolute bottom, investors can at least take comfort from the indisputable reality of the market cycle. Pension-fund investors, the people who are by definition in it for the long haul, can be particularly reassured.

We all got a little bit excited at the end of the 1990s, the era of the "new economy", when some observers did their best to convince us of the death of cycles as we knew them, while the stock markets surged through the roof. It would have been nice if it had been true - Irish pension funds rose by 20 per cent in one quarter of 1998 - but, as we all know now and the wise ones among us knew then, it wasn't.

In the 12 months to the end of June this year, the average Irish pension fund lost 14.3 per cent of its value. In one particularly bad week, overall fund values dropped by 2 per cent, as woes at AIB and Elan combined to hurt most managers.

With the markets still nervous and uncertain well into July, and most pension funds still in negative territory, a look at history will, if nothing else, provide some welcome distraction.

Cast your mind back to the bleak days of the late 1980s, when the world was getting tired of the "yuppie" phenomenon. The largest stock market drop in Wall Street history occurred on "Black Monday" - October 19th, 1987 - when the Dow Jones Industrial Average plunged 508.32 points, losing 22.6 per cent of its total value. The fall far surpassed the one-day loss of 12.9 per cent that began the great stock market crash of 1929 and ushered in the Depression. Irish-managed funds felt the ripple effects of the shock as much as any, sustaining a 14 per cent fall in the final quarter of that year.

Ms Anne Maher, Pensions Board chief executive, describes the 1987 crash as the one "where people thought the world had turned upside-down".

And then, just as we were recovering from that, along came the Gulf War and the consequent rise in oil prices. Here, the market followed a pattern it had chosen during both World Wars, where stocks were automatically sold off and values fell.

Between July and October 1990, stock markets declined by 20 per cent, with Irish pension funds shedding about 15 per cent of their value. Optimism picked up again as soon as attacks on Iraq began and, when the actual fighting ended within a short time, the markets were reassured and set about a quick recovery.

The next major trauma came towards the end of the next decade, when the Russian economy came down with the currency bug that had caused the Asian crisis of 1997 and 1998. As investors became risk-averse and applied caution to all emerging economies, the Russian market plummeted, introducing further uncertainty to an already-jittery market. While the Russian economy may be suffering after-effects to this day, it merely took a number of months for Irish pensions to leave their eastern troubles behind.

Before long, we were riding on the back of the technology bubble, a blip that saw Irish funds gain 14.7 per cent in one quarter of 1999. As one pensions executive pointed out this week, a massive rise in value is often not as newsworthy as a massive fall.

Mr Tom Geraghty, senior investment consultant with Mercer, says the "Anglo-American" pension-fund model - where up to three-quarters of assets goes into equities - has proved "very, very beneficial" to Irish retirees. Like all people connected with pensions, he shies away from emphasising short-term performance and looks instead to five- and 10-year numbers for managed funds.

Take the five-year figures to June 2002. Mercer's figures show the average Irish pension fund returned 7.2 per cent per annum over the period, at a time where inflation was hovering well below 5 per cent.

"The objective of a pension fund is to beat inflation," says Mr Geraghty.

Of course, past performance is no guarantee of future return. Just because equity markets and pension funds have pulled themselves back from the brink before, it does not automatically mean that they're going to do it this time.

Could this particular market cycle be the one to beat the band, the one that leaves us broke and kills off any hope of a comfortable retirement? History shows us that markets engage in a sell-off when bad news breaks and then evaluate the extent of the crisis before preparing to bounce back.

Most commentators agree that the new ingredient in the mix this time round is the "corporate governance" variable - a sense that dodgy accounting practices could pop up in any quoted company, in any form and without warning. Commentators disagree on the extent to which this attacks the basis of the stock markets and kills off any useful reference to history.

"The fundamental question is: is there anything endemic to the working of the capital markets system of the last 100 years that would change one's expectations? I don't think there is," says Mr Geraghty, pointing to comments made by Federal Reserve chairman Mr Alan Greenspan earlier this week as support for his argument that stocks are just about ready to hit bottom. He admits, however, that the sustained pessimism of the past 18 months does stand out in a historical context and acknowledges that some long-term effects could be felt.

Mercer says 95 per cent of Irish institutional pension-fund assets are based in defined-benefit arrangements, placing the emphasis on an employer to deal with the vagaries of the investment markets while the workers simply await their guaranteed retirement income.

Mr Geraghty wonders how long the current equity market gloom will need to last before employers become truly sick of such arrangements and introduce defined-contribution pension schemes, where the workers bear the risk.

Such a trend has already become evident in Britain, where more than half of all defined-benefit schemes are closed to new members.

"I honestly don't think it will happen here in the short-term," says Mr Geraghty, who cites the significant costs and upheaval attached to such a shift.

Still, the possibility exists and carries with it some threats to the retirement income of Irish workers.

Ms Maher of the Pensions Board summed these threats up last week by expressing concern about funding within defined-contribution schemes, suggesting that they could be "considerably lower" than in defined-benefit arrangements thus diluting "the adequacy of the benefits that arise".

The issue is unlikely to go away, even if (or is it when?) the current market depression lifts.

But Ms Maher is keen to stress that any retirement provision is better than none, and she cautions against individuals using current market upheavals as an excuse for holding off on starting a pension.

Putting retirement to the back of your mind might mean that you'll avoid the risks of the equity markets, she says, but it will also offer a rather unpleasant guarantee of having a poorly funded lifestyle when you reach 65.

Which would you choose?