Pension fund capital is devoted almost entirely to the financial markets. While pension fund managers generally direct the money across various asset classes and not only equities, the stock market is commonly used. As a result, performance in the stock market has the ability to sway the overall value of a pension fund, either in a positive or negative way. The stock market also has the ability to affect the timing in which an individual chooses to retire from an employer.
While pension funds receive contributions from plan sponsors and in some cases employees on an ongoing basis, those deposits alone are not enough to increase the overall value of the fund so that plan members have enough money to eventually retire. In 2011, U.S. pensions directed an average of 44 percent of overall capital to the stock market, according to a 2012 Global Pensions Asset Study performed by pension consultant Towers Watson.
In 2008, when the economy was in recession, performance in the stock market caused funding levels at corporate pension plans to drop 17 percent in a matter of months to 91 percent on average, according to "Time" magazine. While a funding status of 80 percent is considered sufficient to cover liabilities, by May 2012, the average funding status for corporate pensions fell below 70 percent due in part to stock market losses, according to BNY Mellon Asset Management.
In the U.S., the percentage of individuals who invested in defined contribution retirement plans rose for the decade ending in 2008, while employees invested in defined benefit plans declined, based on a 2010 study performed by the National Bureau of Economic Research. Unlike defined benefit plans, defined contribution plans offer plan members some level of control over the way that assets are invested based on the choices an employer provides. In using defined contribution plans, retirement plan members were investing more heavily into the stock market. In doing so, they were accepting the risk that would otherwise belong to professional investors in defined benefit pension plans.
The stock market continues to effect pension benefits even after individuals retire. After the Dow Jones Industrial Average declined nearly 34 percent in 2008, the balance of many retirement accounts declined. In 2009, to prevent a scenario where retirees would not have sufficient assets to sustain them through retirement, U.S. federal policymakers placed a moratorium on a law that would otherwise require retirees to make minimum withdrawals from their individual retirement accounts in 2009.
- Time: Pension Funds Weakened by Stock-Market Decline
- NBC News: Funding Gap for State Retirement Benefits Rises to $1.4 Trillion
- Market Watch: Funded Status of U.S. Pensions Fell in May: BNY
- Towers Watson: Global Pension Assets Study 2012
- Bankrate.com: Should You Work in Retirement?
- National Bureau of Economic Research: Does Stock Market Performance Influence Retirement Intentions?
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