From a market perspective, pension funds, which are exposed to stock market investments, have fallen dramatically in value, while the recessionary environment is forcing both employers and employees to reconsider both the affordability and viability of ongoing pension contributions at present. However, individuals must be careful that they do not jeopardise their long-term financial security by reacting inappropriately to short term events.
A recent survey by the National Association for Pension Funds (NAPF) showed that employee confidence in pensions had taken a further significant downturn. This is hardly surprising given that the funds to which they have been contributing have fallen so significantly in value. During 2008, the UK stock market fell by 30 per cent whilst global stock markets fell by around 20 per cent and, as many individuals will have substantial exposure to these markets, fund values fell alarmingly.
However, individuals must remember that pension fund investment is of a long term nature and that, in order to achieve long term growth, short term volatility is, to a certain extent, inevitable. Moreover, while employees and their employers are contributing to pension funds, individuals are “buyers” within the market. As valuations are so low, individuals are effectively buying more units at lower prices.
This is of course no recompense to those individuals who are either at or close to retirement for whom pension fund investment is a far more short term issue. However, in these cases, most individuals are invested in lower risk funds such as cash, fixed interest or “lifestyle” funds, which do not have the same market exposure. Indeed, many of these individuals have actually fared quite well in the current market conditions.
The impact of the economic recession is in many cases more severe and difficult to counter. For many employers, payments for the future such as pension contributions are not as important as other short term expedients. There is no point in providing employees with healthy pension provision if the company is unable to support those employees now. In these difficult circumstances many employers are therefore cutting back or even suspending pension contributions. There is no problem with this course of action; in fact the flexibility offered by pension funds is one of their great attractions.
However, employers must ensure that they communicate the reasons behind such action with their employees and ensure that, when circumstances improve, they reinstate this pension provision.
From an individual’s point of view, money that is currently being set aside for future pension provision may need to be diverted to meet immediate expenditure requirements. Once again, this is no problem provided individuals seek to reinstate their pension provision as soon as is practical and, in an ideal world, make additional contributions to make up any shortfall.
It is perfectly possible for both employers and employees to respond to the difficult economic conditions in which we all find ourselves at present. The key is to ensure that we do not take action now that ignores or puts at risk the long term requirement for adequate pension provision.*David Gascoigne is a consultant from Trigon Pensions, which is an independent and specialist corporate pension consultancy with scheme administrators based in Bristol and Redditch.