Have you received your pension statement lately? Well if so, you may have noticed a drop in its value over the past year.
But don't panic, you’re not alone.
The total value of Irish pensions fell by almost 16% last year, having increased by an average of 4.6% a year over the last decade.
This drop happened right across the world, with international pension values down by just under 17% in 2022.
We’re taking a look at why pension values dropped, and how to make sense of your pension statement.
What are the main reasons behind this drop?
Inflation and the response of Central Banks lead to huge volatility in the markets last year.
When Central Banks raise interest rates, this weighs upon returns and things like equity or company shares, and on Government bonds which are the core of how pension schemes tend to invest.
Rising interest rates and the geo-political uncertainty caused by the war in Ukraine wiped significant value off pension funds around the globe.
But things are beginning to look up.
Figures from the Central Bank of Ireland show that pension funds here recovered somewhat in the first quarter of this year.
The Irish pension fund sector jumped by 9% or €10.6 billion between January and March.
That brings funds' total assets to €128 billion.
The Central Bank said this "partially reverses" the trend observed during 2022, but assets remain down 6.8% on the series high of €137 billion at end of 2021.
Should we be worried about a drop in pension values?
Pensions are designed to provide income during retirement, which is typically a long-term goal.
Paul Merriman, CEO of Fairstone Ireland and Founder of financial advisory firm Askpaul pointed out that short-term fluctuations in pension values may not have a significant impact on your retirement income if you have many years until retirement.
"It's important to focus on the long-term performance of your pension investments rather than short-term fluctuations," he said.
But he said it is good practice to regularly review your pension plan and investments.
If you have concerns about the drop in your pension value or need clarification on your pension statements, it is a good idea to consult with a Certified Financial Planner (CFP) or Qualified Financial Advisor (QFA).
They can assess your specific circumstances, provide personalised advice, and help you make informed decisions about your retirement savings.
Is there anything we can do to minimise losses?
Diversification
It is important to review the diversification strategy of your pension fund, to understand how different assets contribute to the overall value.
"Pension funds typically invest in a diversified portfolio of assets to mitigate risk," Mr Merriman explained.
"While some investments may experience declines, others may perform better, helping to balance out the overall performance."
Spreading your pension investments across different asset classes, such as stocks, bonds, and real estate, can reduce the impact of a decline in any single investment.
"Diversification helps balance risk and potential returns," he added.
Stay informed and educated
Keeping up to date on financial markets, economic trends, and investment strategies is also recommended.
"Understanding the factors that can affect pension values will empower you to make informed decisions," Mr Merriman said.
"Consider staying abreast of financial news, reading investment literature, or consulting with a CFP or QFA to enhance your knowledge," he added.
Mr Merriman said to avoid reacting impulsively to market volatility.
"Trying to time the market or making hasty investment decisions based on short-term fluctuations can be risky.
"Stay committed to your investment strategy," he added.
What should those nearing retirement do?
Revisit your risk tolerance
A significant drop in pension values close to retirement can have a more significant impact on your retirement income.
As you approach retirement, Mr Merriman said it's essential to reassess your risk tolerance.
"Consider adjusting your asset allocation to a more conservative mix that focuses on capital preservation rather than aggressive growth," he suggested.
"This approach can help reduce the potential impact of market volatility as you near retirement."
Consider delaying retirement
If you have flexibility in your retirement timeline, Mr Merriman said you may want to consider postponing retirement for a period.
"This can provide an opportunity for your pension values to potentially recover from any recent decline.
"Additionally, delaying retirement allows you to continue contributing to your pension or other retirement savings, potentially increasing your overall retirement income," he said.
Explore additional savings options
If you have concerns about the adequacy of your pension, you can consider exploring additional savings options.
Mr Merriman said this could include contributing to individual retirement accounts, employer-matching retirement plans, or other investment vehicles.
"Increasing your savings can help supplement your pension and provide a greater sense of financial security in retirement," he added.
How do I make sense of my pension statement?
You should receive a pension statement at least once a year.
The document can seem pretty daunting - but instead of ignoring it, here are seven things you should do.
1 Review contributions
Pay attention to the contributions made to your pension plan during the statement period.
Mr Merriman said you should verify that the amounts match your payroll deductions or employer contributions as expected.
"Ensure that all eligible contributions have been accurately recorded," he said.
2 Assess investment performance
Examine the investment performance section of your statement.
Look for information on the rate of return or investment gains or losses over the statement period, Mr Merriman suggested.
"Compare the performance against relevant benchmarks or the overall market trends to assess how well your investments have performed," he said.
3 Check account balance
Note the current account balance of your pension plan.
This figure represents the accumulated value of your contributions and investment returns.
"Monitoring changes in your account balance over time can help you gauge the growth and overall health of your pension fund," Mr Merriman said.
4 Understand fees and expenses
Pay attention to any fees or expenses disclosed in the statement.
Mr Merriment said this may include management fees, administrative costs, or other charges associated with the management of your pension plan.
"Understanding these fees can give you insight into the potential impact on your investment returns."
5 Projected benefits
Many pension statements provide estimates of your projected retirement benefits based on certain assumptions, such as retirement age and salary projections.
Mr Merriman urged people to pay attention to these projections.
"They give you an indication of the potential income you can expect in retirement," he explained.
"Consider reviewing these estimates periodically to track your progress towards your retirement goals."
6 Seek clarification
If there are terms or sections in your pension statement that you don't fully understand, don't hesitate to seek clarification.
Mr Merriman said you should contact your pension plan administrator or human resources department to get the necessary explanations.
"It's important to have a clear understanding of the information provided in your statements," he said.
7 Keep a record
Maintain a file or folder where you keep all your pension statements together.
This allows you to easily track the changes in your pension plan over time.
"Having a record of past statements can also be useful for comparison, tracking your progress, and preparing for retirement," Mr Merriman said.
