THE year 2022 is one that many pension fund managers would want to forget.
After numerous upheavals in the financial markets, which saw pension funds declining globally, pension contributors, pension fund managers, and investment managers are looking forward to a year of stable growth and recovery.
Already some pension funds in Jamaica are showing signs of recovery from the losses of 2022. Last year, sustained high inflation and interest rates, supply chain disruptions, and international geopolitics created a negative impact on pension funds globally. Pension funds are invested in different asset classes, such as stocks, bonds, cash equivalents (short-term securities), and real estate. Bonds and stocks suffered major losses last year. The international outlook indicates that already there are signs of stability returning to the financial markets.
Locally, pension contributors continue to invest after much uncertainty. One company that is now seeing recovery in its pension portfolio is BPM Financial Limited (BPM) and the outlook for the rest of the year seems promising.
Employees who are nearing retirement as well as retirees can look forward to some reprieve from high inflation. A report from the Bank of Jamaica Monetary Policy Committee, stated that inflation has declined, in keeping with the BOJ's monetary policy strategies. Inflation moved from a high of 8.4 per cent in April 22 to a low of 5.8 per cent in April 2023.
The BOJ targeted inflation rate is 4-6 per cent. The decline in inflation is due to external events such as the decline in shipping prices, grain, and fuel. These commodities have a direct impact on the Jamaican economy which is heavily dependent on imports. There has been an increase in interest rates in the domestic market.
According to the report, 2023 should see further restrictions in credit terms. Due to recent price increases and the increase in the minimum wage, the BOJ anticipates an increase in the inflation rate between June to September of 2023. The economy is expected to continue on a growth trajectory and the exchange rate is projected to be stable.
I have had conversations with investors who are concerned about the local stock market. But be reminded that it's a game of patience. The US stock markets are recovering and investors are regaining confidence, and it's only a matter of time before the local stock market recovers. Globally many economies are expected to grow slowly.
With this year projected to be better economically than 2022, I advise investors not to abort their long-term investments for short-term gains. It's an opportunity to review and rebalance your portfolio to minimise losses in the short term and maximise gains in the long term. Wealth is created in the long term.
For employees who contribute to a pension plan, now is the opportune time to review your pension contribution and assess your retirement goals. Having a pension portfolio consisting mainly of low-risk investments will not pay off when you are ready to be paid a pension. Inflation is a silent thief. Make sure to automate your pension contributions and benefit from the frequent compounding of your investments. Also, remember that lump sum payments can be made to your pension plan, provided your total contribution does not exceed 20 per cent of your gross annual salary. The sacrifices you make now will pay great dividends in retirement.
How does a pension fund work? It accumulates pension contributions or large sums of monies that are invested in the financial markets to provide pension income for employees or contributors upon their retirement. Pension funds are therefore long-term investments. The higher-risk investments provide greater returns in the long term. This is the reason real estate and stocks provide greater returns for investors over the long term. Stocks provide the greatest return as a long-term investment than any other asset class. It's therefore important to start pension plans early and benefit from exponential growth in pension funds over decades of investing. The average retiree is expected to spend another 20 years or more in retirement after the normal retirement age of 65.
It is widely documented that ageing is responsible for some chronic diseases. The advancement of technology has led to artificial itelligence (AI) now being used to analyse the human molecular feature of healthy humans, the results of which are used to provide medical interventions that will enhance longevity in humans. Investing in the technology sector to supplement pension income can provide great yields for investors and should be included in every investor's asset mix. Be reminded though that investing in stocks should be a long-term goal to achieve exponential compounding of your investments.
World-renowned investor Warren Buffet said, "If you aren't willing to own a stock for 10 years, don't think of owning it for 10 minutes." He has been investing in the stock market for 80 years.
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 email@example.com