THE year 2022 has seen drastic declines in pension funds asset values in Jamaica and globally. Uncertain and unstable economic conditions, marked by high inflation, took a toll on pension fund performances.

Central banks globally waged a war on inflation by increasing interest rates, which impacted the fall in the value of bonds, one of the major asset classes of pension funds. The stock market also suffered sharp declines and adversely affected pension fund values around the world.

A 2021 Organization of Economic Co-operation and Development (OECD) report showed that in 30 countries, 50 per cent of pension funds were invested in bonds, whereas 18 countries invested a larger portion of assets in stocks. Countries that had a greater percentage of pension funds invested in stocks included the United States, Australia, Canada, the Netherlands, and Switzerland. In 2022, some of the largest pension fund markets in the world, such as the US, Japan, Australia, the Netherlands, the United Kingdom, Canada, and Switzerland suffered a sharp decline in returns on pension fund performances, ranging from negative four per cent to negative 22 per cent.

Meanwhile, in Jamaica, the Financial Services Commission’s latest overview of the private pensions industry statistics, as at September 2022, showed a total asset value of $690.89 billion. There was an estimated $15-billion loss “in total private pension assets”. Stocks and shares are the second largest asset class in the private pension fund industry, representing 22.05 per cent of total funds invested. Bonds and debentures accounted for only 5.3 per cent of private pension assets.

It’s a challenging time for employees who are nearing retirement. There are concerns that their pension payout will be less than anticipated. I will be the guest presenter at an upcoming seminar for pre-retirees and am sure that the major concern will be how to navigate the retirement years with reduced pension income. There will be employees who may contemplate working for a few more years to allow their pension fund to recover. Some may decide to have discussions with their employers, seek employment elsewhere, or create their own employment. It is always wise to have streams of income in retirement. Crises can arise at any time.

With regards to pension fund management, fund trustees have a role to play in overseeing how funds are managed on behalf of members. Pension fund trustees are appointed by the organisation and also elected by members of the fund to give oversight of the management of the fund and protect the interest of the members. The trustees should act in accordance with the trust deed and rules, which relates to the legal documents consisting of the duties, powers, and obligations of the trustee and the prescribed procedure. In acting in the best interest of the member or beneficiary the trustees can determine the investment strategy to be employed and make amendments to the pension fund rules. Especially with the decline in pension fund values, trustees have a role to assess the fund value and advise members nearing retirement of their options. The Financial Services Commission advised trustees to keep a close watch on pension fund portfolios and ensure that funds are adequately diversified to reflect the changes in the financial markets and the optimum benefit of the members.

Saving and investing early for retirement is very important for contributors to a pension plan. The lesson from last year’s private pension performance should teach us that low- or high-risk investments are susceptible to loss in asset value. Investing in a pension plan is a long-term goal. Those who start early and remain on course with a diversified portfolio of stocks, bonds, real estate, and government securities will reap the benefits of time and compound interest working together to create a nest egg for retirement. Losses in the stock market are temporary and pension funds need time to recover losses and create a buffer in times of market volatility or market decline. Keeping all pension contributions in low-risk instruments for the long term will not beat inflation or build purchasing power. It’s important to stay calm. A professional financial advisor can assist in times of uncertainty and decline in asset value by aligning the pension and investment portfolios with the client’s unique goal. Both Vanguard Research and a 2021 study by Russell Investments found that an advisor can provide behavioural coaching that yields higher returns on investments for clients. Renowned investor Warren Buffet says, “The most important quality for an investor is temperament, not intellect.”

Grace G McLean is financial advisor at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com