The Effects That the Stock Market Has on Pension Funds

Many people depend on their pension's funds.

Many pension funds provide for the benefits of their membership by investing a portion of their wealth in the stock market. Although it is possible to invest in the stock market in such a way as to reduce your risks, there is no such thing as a completely risk-free stock. As the stock market rises and falls, it has the potential to greatly impact the wealth of the average private pension fund.

Benefits

Over time it has been shown that pension funds, both in the public sector and in the private, tend to increase the benefits that they offer their membership. In the private sector, this is done to improve employee retention and recruitment. Public sector pension managers also face the political pressure of public employee unions. To pay for increased benefits, funds have had to rely on very high stock returns that may be unrealistic.

Obligations

There is no law that requires pension funds to have enough assets to fully fund their benefit obligations. As of 2008 pension funds as a group held only enough assets to pay for 91 percent of their overall benefit obligations. This has become a serious concern in public debates over retirement. It may become the case that a large number of pension funds will be simply unable to pay for their overall benefit obligations.

Transition

Traditionally, most pension funds have been classified as benefit defined, which means that there are guaranteed benefits regardless of the amount of money you directly pay into the fund yourself. As funding issues have now arisen, partly due to losses on the stock market, there has been a transition to making more funds contribution defined. This means benefits are no longer guaranteed but rather there are specific requirements on how much an employer pays in.

Growth

Though pension funds face major problems trying to fulfill the promises they have made to their memberships, problems might be worse without the stock market. The stock market has allowed pension funds to grow their wealth over time. As the market has declined, this wealth has been reduced, but most pension funds have still made more money on the market then they've lost.

References

• "Time"; Pension Funds Weakened By Stock-Market Decline; Jeremy Caplan; October 2008
• "New York Times"; U.S. Moves To Ban Pension Funds From Commodity Markets; Barani Krishnan; 2008
• "Telegraph"; Millions of Pension Investors to Suffer From Bank Share Falls; Emma Simon; January 2009
• "Christian Science Monitor"; Will Pension Funds Suffer The Next Financial Implosion; Kathleen Connell; February 2009
• "New York Times"; Behind Fraud Charges, New Jersey's Deep Crisis; Richard Perez-Pena; August 2010
• "USA Today"; States Try To Stem Losses in Public Pension Funds; Kathy Chu; November 2008

Resources

• "USA Today": Money
• The Motley Fool
• "The Wall Street Journal"