During previous episodes of market turbulence, little attention was paid to the performance of pension funds. Now greater financial awareness and a growing number of people whose retirement provisions are exposed to the market mean that plunging pension funds are causing a lot more brows to furrow.
For people who have 10 or 15 years to go to retirement, "it's pointless to panic", according to Mr Brendan Kennedy, associate director of pensions at Canada Life.
But there may be individuals close to retirement who are in line for "a nasty surprise", he adds, particularly if they haven't moved their funds away from equities to safer harbours such as bonds.
But moving to more stable investments can be counter-productive, limiting opportunities to benefit from future growth.
"For very old members it might be appropriate to move from equities to bonds, but certainly for the majority, that kind of knee-jerk reaction would not be appropriate," says Mr Neil Herlihy, a senior consultant at Watson Wyatt.
During the year, chemist chain Boots completed the transfer of its company pension fund from equities to 100 per cent bonds. "The Boots situation is somewhat unique," comments Mr Herlihy.
"It was extraordinarily well-funded when it took the decision to move to bonds. They locked away a surplus. They may also have had a more mature profile."
To move a pension fund away from equities now is "intuitive but illogical", agrees Mr Stephen Lalor, a pensions consultant at Coyle Hamilton.
People close to retirement have suffered "a double hit", according to Mr Lalor.
"They would be down 14 or 15 per cent for the year so far, on top of last year's losses."
"They would also have found that the money in their pension fund will have bought less of a pension, because annuity rates are linked to interest rates."
The move from defined benefit to defined contribution schemes has widened the net of people participating in the stock market. If PRSAs succeed in attracting people who are currently pension-free, then market participation will increase again.
"The PRSA is going to be a mass market. It's consciously designed for people who are less financially experienced," says Mr Kennedy, who is also chairman of the Society of Actuaries' working group on PRSAs.
People who don't have confidence in their own choice of investment strategy have a fallback option: some 70 or 80 per cent are likely to opt for the default investment strategy on standard PRSAs, according to Mr Kennedy.
This strategy is supposed to conform to "reasonable expectations", but Mr Kennedy argues that the PRSA holder might only decide if it was "reasonable" after they retire and look at what kind of pension is in their hand. The performance fluctuations a professional investor will tolerate may also differ from their clients' expectations of what is reasonable.
"At some point during the pension the person could find the value of the fund is 20 per cent lower than it was at the beginning. A knowledgeable person would say the risk versus the potential trade-off is worth it. Anyone else might say, oh my God, what has happened to my pension fund?"
Next year, some companies will be asking ""oh my God, what has happened to our accounts" as those who have implemented the FRS 17 accounting standard watch their pension scheme switch from showing up as an asset to a liability. "The swing will be quite big in some cases," says Mr Herlihy.
The standard does not have to be fully implemented until 2005, but some companies have chosen to adopt it at a more rapid pace, including pension assets and liabilities on their balance sheets rather than simply as a note disclosure in their accounts.
"If the pension scheme assets fall, as they have done this year, it will result in a weakened balance sheet," explains Mr Herlihy.
It is feared the FRS 17 standard could result in the closure of more defined benefit schemes to new members.
If companies seek to protect their bottom line, the emphasis on whose responsibility it is to provide for retirement will inevitably shift further onto the employee.
