According to figures released by the National Association of Pension Funds (NAPF), UK pension savings have been left poorer by £120 billion due to the market volatility in the last one month.
Figures suggest the stock price gains over the last 11 months have been wiped clean and investment levels are back at last summer levels.
The average value of the personal pension pot in the UK has dropped by £2,000 or about 6 per cent.
However, experts are not pressing the panic button yet. “Markets go in cycles and we will ride through several more drops before arriving at our retirement,” said Adrian Boulding, pension strategy director at Legal and General.
“Pensions are a log-term investment. People put their money in and accept volatility as they go along.
The stock market is difficult to predict and developments can change scenarios overnight. It moves up gradually, in steps, but can come down fast, like the recent default scare of Greece and ratings cut of the US economy.
There have been apprehensions in many quarters that the retired will be the most badly hurt. However, Boulding said most pensioners will be just be fine as two sufficient risk mitigation steps are taken well in advance.
“The way most pension funds work these days is that they follow what is called lifestyle switching, which sees funds gradually moved out of equities into cash and gilts over a period of five to ten years before people retire. This is done little by little every month to avoid having to try and guess market timings and protects pension savings from volatility”, he explained.
“So those just about to retire will have funds that are completely switched out of equity markets with usually 25% in cash, because people usually like to take a 25% tax free sum, and 75% into gilts, because they move in line with annuity prices. When annuity rates are low, gilts go up. So, although annuity rates have gone down over the last month gilts are high as foreign investors are buying UK gilts as they believe we can pay our debt. This means those retiring have a higher value of gilts to buy their annuity and so the two net each other out and they will get pretty much the same pension. This is called immunising savings against movement in interest rates,” he added.
However, employees with about five years to retire will be disappointed to find that their contributions during the last few years are unlike to witness any significant value appreciation.