European Pensions and Why Pension Funds Should Be Resilient to Turbulent Economic Conditions

According to data released by the Organisation for Economic Co-operation and Development (OECD), private pension funds lost a staggering twenty-three per cent of their value in 2008. The stock marker collapse has developed into an economic crisis, with pension funds falling from declining and earnings and rising unemployment denting pension contributions. Public pensions are being affected by the rise in unemployment benefits and fiscal stimulus packages putting a strain on the public purse.

The largest of the private pension fund losses was felt in Ireland, where losses of thirty-seven per cent were recorded. The Czech Republic experienced the smallest losses below ten per cent.

Stock markets across the world have plummeted since last year, so the diverse range of private pension losses can’t be explained by relative losses in the markets. How these pension funds were invested seems to be the deciding factor. While stock markets in OECD countries fell by around forty-five per cent in 2008, Government bonds tended to rise, with the international index up by over seven per cent in 2008.

The countries whose pension funds invested more in bonds than in stocks like the Czech Republic and Slovakia seemed to have fared better than English-speaking countries where pension funds tended to be invested in equities.

Poland’s private pensions lost more than other Central European countries because of a law which was supposed to aid the Polish stock market. Open Pension Funds (OPFs) are limited to investing only 5% of their assets outside Poland. While this had meant the Warsaw Stock Exchange is important to the region, but the over-population of funds in the local market drove the over-valuation of Polish stocks; a bubble which burst when the economic crisis swept through.

While private financial sources make up over forty per cent of retirement incomes in Australia, Canada, the UK and US, they only make up five per cent of incomes in Austria, the Czech Republic, Slovakia, Hungary and Poland.

For younger workers in these areas though, pensions are expected to provide a significant chunk of retirement incomes. Pension funds being resilient to turbulent economic conditions is of paramount importance for this new breed of worker.

Adam Cain writes on a number of subjects on behalf of a number of different businesses and organisations.

Pensions Regulator is the UK regulator of work-based pension schemes, working to improve confidence in work-based pensions by protecting members’ benefits and encouraging high standards and good practice in running pension schemes

http://www.thepensionsregulator.gov.uk/