Protecting the value of your pension fund

Nobody wants to see the value of their hard-earned pension savings eroded by market volatility. But how can people protect themselves against such shocks without unduly limiting the prospects of continued growth?

This question isn’t as straightforward as it might first appear, however. There are a number of factors to be taken into account, most notably the long-term nature of pension investment and the distance the individual concerned is from retirement.

“If someone tells you the value of your house has gone up or down it’s only important when you go to sell it,” explains Bank of Ireland head of pensions and investments Bernard Walsh. “If you have no intention of selling it for the foreseeable future it makes no difference at all. It is the same for pensions: the important date is the drawdown. And even if the value of the assets in your fund has fallen, you are still buying good-value assets quite cheaply with your monthly contributions because of the price fall. This is the advantage of cost averaging.”

Their value will go up again, eventually. “If you think it won’t, you are making an assumption that the world will go into recession for very many years, that economies will stop growing, that companies will stop increasing turnover and profits,” says Walsh. “That is very unlikely to come true.”

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Shane O’Farrell, director of products at Irish Life Corporate Business agrees: “Pensions are a long-term savings vehicle — many people could be saving into them for 30 to 40 years,” he says. “Periods of market volatility can be unsettling for pension plan members, especially when they see their pension values dropping. However, when you are reasonably far away from retirement, a market dip is not a cause for panic — you will have a very long time to recoup any losses as markets recover.”

In fact, if you are far away from retirement, it is often best not to switch to more secure assets in periods of volatility, because you may do so after the downturn, and actually end up missing the upswing in markets as they bounce back, he points out.

“So, the most important thing to take account of is your proximity to retirement,” O’Farrell continues. “In essence, the further away you are from retirement, the more you should look to growth-focused investment funds to build your savings; and as you get closer to retirement you should look for more secure investment assets, which protect against market volatility and match the way in which you are likely to draw your pension benefits.”

According to O’Farrell, the majority of members in Irish Life group pension plans are invested in a default lifestyle strategy. “Our lifestyle strategies are the default investment option in our pension plans and are focused on growth when a member is further away from retirement, with the member’s assets then being automatically directed to increasingly lower risk funds as they approach retirement.”

Irish Life uses a sophisticated approach to direct members’ assets towards funds which will most closely match their likely intentions on retirement, whether that is taking a cash lump sum or investing in an approved retirement fund (ARF) or an annuity.

For example, if the analysis shows that the likely outcome for a member will be to take 25 per cent of their fund as a tax-free lump sum, with the balance being invested in an ARF, the lifestyle strategy will automatically adjust to invest in this way, with 25 per cent of the member’s final fund value being switched into a cash fund, and the balance of 75 per cent being moved to a medium-risk fund which is consistent with the likely long-term ARF investment.

“This allows for a smoother transition to the ARF product and ensures continuity of investing through retirement, rather than a form of aggressive de-risking in the approach to retirement, which would be suboptimal from the member’s point of view,” says O’Farrell. “We call this glide-through retirement investing.”

Walsh advises people to engage with their pension provider to ensure that the lifestyle strategy chosen is appropriate for them. “In the UK, well in excess of 80 per cent of occupation scheme members choose the default strategy,” he notes. “In Ireland, well over 90 per cent choose it. But it is always worth looking at this to ensure it is right for you and your circumstances. For example, if you have decided to work on after the age of 65 and that is the retirement date assumed in the plan it won’t necessarily be right for you.”