In the last few months there’s been significant upheaval in the financial markets. The purpose of this update is to provide some background to recent events, and suggest some things you should consider when reviewing your pension investments.
The ‘credit crunch’ – what is it and what’s caused it?
A number of factors have contributed to recent events:
· The US housing market has fallen sharply, which has caused problems for those banks/investment firms who had effectively taken big ‘bets’ on the market continuing to rise. In some cases, the problems were so severe that banks had to be bailed out, and some investment firms actually became insolvent.
· The global economy and the financial markets rely on a stable, healthy banking sector. The recent uncertainty has meant that banks have become unwilling to lend to each other, which in turn has made it difficult for businesses to borrow money. The unwillingness to lend money is known as the ‘credit crunch’.
· On top of this, the last few years have seen many companies, and individuals, take on high levels of debt that they’re now struggling to pay.
· Stock markets around the world have fallen sharply following recent events, fearing that more banks/investment firms may collapse, and that the global economy may fall into a deep recession.
Is my pension affected?
If you’re a member of the Lifetime Benefits Plan, the value of your account moves in line with investments, and so it’s likely that your account has fallen recently, unless you’ve been mainly invested in the bond and cash funds.
It’s natural to be concerned about recent events, particularly if you’re approaching retirement, but there are a number of things to bear in mind:
· Firstly, unless you’re nearing retirement, your pension savings (your ‘pot’) should be viewed as a medium to long-term investment, which means that you should have time to recover from falls in the stock market.
· If you chose to invest in the ‘lifestyle’ strategy when you joined C&W, the strategy gradually moves greater amounts of your pot into less risky funds, such as bonds and cash, as you near retirement. So, depending on how close you are to your retirement date, your funds will have been protected to some extent from recent stock market falls.
· If you selected the ‘freestyle’ strategy (where you make your own investment choices) you should consider the amount of risk that you feel able to take as you approach retirement. For instance, if you’re largely invested in equity funds, your pension pot could be reduced by sudden falls in the stock market.
· Finally, regardless of how old you are or what funds you invest in, your pension account is kept entirely separate from C&W. This means that your pension savings are ‘ring-fenced’, and are not directly affected by C&W’s business performance, or share price.
What should I do if I’m still worried about my pension?
Stock markets typically rise and fall quite regularly and, although current conditions are worse than we’ve seen for a number of years, it’s expected that stock markets will recover at some point, and produce competitive returns over the medium/long term – even if things continue to worsen over the short term.
If you’re thinking about changing your investment strategy, whether you invest using the lifestyle or freestyle strategy, you should think very carefully about the changes you might make and avoid panic reactions. It might be useful to consider the following areas:
· how long you have until retirement, or until you need to draw your pension.
· the level of risk you’re prepared to take with your pension savings, taking into account your financial position overall. There is useful information on the website that can help you make this decision.
· it’s worth noting that continuing to invest in equity funds when prices are lower means that the same level of monthly contribution buys more ‘units’ than it did before. So, if and when markets stabilise and rise, your pension savings may increase even more.
Although things may seem uncomfortable now, if you have time on your side your pension savings should have an opportunity to recover from any losses.
