Not long ago I wrote about a survey amongretirement fund members who were given the option to convert from a defined benefit fund to a defined contribution type of fund.
The survey indicated that 84 percent of the members elected to move the actuarial values of their retirement funds to defined contribution funds which are exposed to stock market fluctuations.
With hindsight many people must be regretting this decision, especially those who are just months away from retirement. Already I have heard of several people who have had to postpone their retirement in the hope of an upturn in the stock market.
Others may not be that lucky and may have reached their compulsory retirement date: they have to retire on what they have in their retirement funds. This could mean a big drop in the income they can look forward to.
Those who elected to stay in the old-style guaranteed fund must be feeling quite smug. They have nothing to fear apart from a worst-case scenario that their company could go broke one day and not honour its guarantees to the company pension fund.
The sharp drop in the market has reinforced several issues, including the volatility and unpredictability of stock markets. While stock markets have over time delivered the best returns to investors, there have been short periods during which stock markets have not been a great place. Exactly when such a time arises is very hard for even seasoned pension fund managers to predict.
The issue, however, is that with the big move away from defined benefit funds to defined contribution funds, the investment risk has moved from the retirement fund to the individual members.
And that is the scary part. I often wonder how many people fully understood the risk of their decisions when they chose to change funds, no doubt with the temptation of enhanced actuarial values.
If you are in a defined contribution fund it is vital that you fully understand the long-term ramifications. You are now exposed to the risks and returns of being associated with the market.
The current market downturn may turn out to be blessing in disguise in that in future people will take more care of their retirement planning. But as a long-time student of human behaviour, I personally doubt it.
Perhaps large companies will have to introduce investment guidance courses for staff who are members of defined contribution funds.
The investment world has become very volatile and unpredictable. In the past eighteen months we've had two currency collapses as well as two bull and two bear markets.An offshore dimension was added to this already confusing picture. Yet people still prefer to take their money out of guaranteed funds and transfer it to these shark-infested waters.
People will have to take a far greater interest in their retirement funds. The choice of your investment portfolio becomes far more than simply choosing a high-, medium- or low-risk portfolio.
However, what you need to realise is that once you are out of a guaranteed fund YOU as the member carry the risk and therefore the responsibility.