Pension funds lose almost 7% as markets crisis grows

Irish pension savers have seen almost 7 per cent wiped off the value of their pension funds over the summer as a result of the mounting difficulties in the US mortgage sector.

Mercer Investment Consulting in Dublin said pension savers' funds had lost 4 per cent so far in August, following a 2.7 per cent loss in July. The steep falls have been precipitated by a growing crisis on global stock markets.

Share prices around the world tumbled again yesterday as it emerged that the biggest US mortgage firm, Countrywide, was in financial difficulty.

Dealers in Dublin described the crisis in confidence among investors and the mass selling of shares that followed as "carnage".

The Iseq index of Irish shares fell 3.8 per cent, with €4 billion slashed from the value of the companies listed on the index by the time the market closed yesterday evening.

Stock market tickers showing the direction of share prices were almost all red by the afternoon, indicating another bad day for investors and pension funds.

At the end of June, Irish-managed pension funds were up 4.6 per cent on the start of the year, but the summer turmoil in financial markets has meant they have swung into negative territory, down about 1 to 2 per cent for the year so far.

"There is always the hope that markets will recover, but the losses are quite substantial," said Noel Collins, a senior consultant at Mercer, which advises companies on how they should invest their pension funds.

The losses most seriously affect people in defined contribution pension schemes who are close to retirement and may have to cash in their pension fund soon. However, many pension schemes have been redesigned in the past five years so that they automatically move the funds of older members away from risky shares and into less volatile assets such as cash and bonds as they near retirement age.

"Many schemes would have that kind of protection in place," Mr Collins said. He added that pension fund managers should reduce the amount of money they are investing in the Irish stock market, which is dominated by a handful of large stocks in the badly affected financial and construction sectors.

Although the Iseq has performed well in recent years, it has been weaker than other stock markets this year. The index is down more than 14 per cent since the start of 2007.

"This year hasn't gone well and it does seem like we are seeing a bit of an unwinding," Mr Collins said.

Despite the massive losses, which saw Bank of Ireland's share price drop 5.5 per cent and building materials firm CRH fall 3.8 per cent, the Iseq finished the day in a better position than the London Stock Exchange.

The FTSE 100 index tumbled 4.1 per cent, its biggest daily decline since March 2003, as credit market fears fuelled a sell-off of shares.

It is now looking increasingly unlikely that the European Central Bank (ECB) will go ahead with the hike in interest rates it was planning to announce on September 6th, NCB Stockbrokers economist Dermot O'Brien said yesterday.

"Lobbing a rate hike into fragile market conditions would unnecessarily exacerbate the problems and, even if conditions calm down between now and then, three weeks is too short a period in which to expect a renewal of confidence," he said.

It is possible that the ECB, which has increased rates eight times since December 2005, may cut interest rates by early 2008, Mr O'Brien added. Politicians yesterday weighed in behind the ECB's efforts to calm investors' nerves.

French president Nicolas Sarkozy interrupted his holiday in the United States in an effort to allay fears of broader than anticipated damage to the global economy, which he said was enjoying its best run of growth in decades and was healthy enough to withstand the pressure.

The panic on the stock markets has been sparked by fears that more big banks are nursing hidden losses related to the high rates of loan defaults in the US mortgage sector.