Pension Funds Should Be Resilient To Turbulent Economic Conditions

The recession has affected pensions all over the world

, but up until now Central European pensions seemed to have resisted. There is a possibility that European governments could use the global economic downturn as an excuse to U-turn on important pension reforms.

According to data compiled by the Organisation for Economic Co-operation and Development (OECD), private pension funds lost twenty-three per cent of their value last year. The stock market collapse has evolved into a full-blown economic crisis, with pension funds falling from falling earnings and rising unemployment. Public pensions are being affected by the rise in unemployment and fiscal stimuli promised by the government putting a strain on the public purse.

The biggest pension fund loss was felt in Ireland, where losses of 37 per cent were recorded. The Czech Republic experienced the smallest losses, at below ten per cent.

Stock markets globally have lost value since last year, so the diverse range of private pension fund losses can't be explained by relative losses in the markets. How these pension funds were invested seems to be a more important factor. While stock markets in OECD countries fell by around 45 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 pension funds 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 should be resilient to turbulent economic conditions.

by: john mce

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