If you have been saving diligently towards your pension for years, sudden market turmoil can be unsettling. So, what happened to global markets in the first half of the year and what does this mean for your pension savings? Here’s what you need to know.
What is happening to global markets
After a decade of record low interest rate levels, Central banks worldwide abruptly shifted their monetary policy during the first half of the year by increasing interest rates, in an effort to control the surging inflation that reached 40-year highs.
Global supply chains had been badly affected after the beginning of the COVID-19 pandemic, with disruption in production and shipping, resulting in shortages for a wide range of goods and much higher transportation costs. The ongoing accommodative policies around the world also helped support household incomes and spending which led to a surge in inflation. Rising energy and food costs made things worse.
The combined impact of supply chain disruptions and the Russia/Ukraine situation, forcing Central banks to normalise monetary policy aggressively to deal with inflation, triggered the worst bond market fall since bond returns have been recorded and a plunge in global equity markets.
As a consequence, all investment portfolios irrespective of the asset mix and risk profile have been negatively affected.
How pensions work
Your pension savings are most likely invested, and most of these investments are typically in the form of equity funds and bond funds. Global markets are influenced by various factors. The higher the uncertainty, the higher the fluctuations experienced. This is also reflected by the balance of your pension savings.
Your online pension account gives you access to your pension at any time, making it easy to view your pension account balance. If you were in the past a member of a provident fund, most probably you wouldn’t have been offered this feature, so it might be a new experience for you to see your pension balance fluctuate for the first time. And this might at first seem worrying! But you can rest assured that all pensions behave in this way as they reflect market conditions.
Pension saving is a long-term investment
Pension saving is a long-term investment that has historically ridden out all sorts of financial crises of the past. As you don’t normally have access to your pension savings before retirement, this means you can invest it differently from money that you save to cover your short-term needs. Generally, the longer your time horizon, the higher the risk level you can assume, as you have the time to ride out any periods of short-term market volatility and recover any losses, although this is not guaranteed. So if you have several years before you retire, there is still time for your pension savings to recover from such falls that occur in the short to medium term.