Ifac advises Tipperary pension holders on how to lessen the impact of inflation on their pensions

Ifac, Ireland’s farming, food and agribusiness specialist professional services firm, is advising Tipperary pension holders to make sure they know how much risk is being taken with their pension money and how well is it diversified.

Martin Glennon, Head of Financial Planning at ifac says, “This year has been a very turbulent one for pension funds, with falls averaging -10%. But you can take proactive steps to lessen the impact on your pension.”

How is inflation impacting my pension?

The two main components of most pension funds are stock market investments and government bonds. Stock market investments are seen as growth assets, and government bonds are seen as more secure assets. How much of your money is in each will depend on your risk profile, but as a guide, a medium-risk fund could have 40% invested in each asset. The fund manager can increase and reduce the amount held in each.

Stock Markets

The economic world is concerned that we are sliding into a recession. The war in Ukraine and subsequent increases in commodity prices such as wheat and oil have contributed to this turmoil. Add to this recent job cut announcements, and it’s clear to see why the profitability of companies is under scrutiny. This has led to an increase in the volatility of the large stock markets, with the Euro Stoxx index down 15% and the S&P500 down 17%, year to date.

With this type of volatility, most pension investors would prefer their fund manager to reduce the holding in the stock markets and increase the investment in more secure assets. And that’s what fund managers would typically do. But here is the real problem.

Government Bonds – not so secure!

Inflationary fears have forced central banks to increase interest rates very quickly. And at record-breaking levels. The ECB rate has gone from 0% to 2% in three months. In the last few years, governments have been borrowing money at next to zero interest rates. The increase in interest rates has reduced the market value of these existing government bonds. Subsequently, the bonds held in pension funds are seeing reductions in value of up to 20%! Remember, these are supposed to be the more secure assets.

Diversification Works

The inclusion of other asset classes, such as property, infrastructure, and commodities, has helped lessen the impact. The average medium-risk pension fund return is about -10%. The best-performing funds have suffered losses of circa -4% to -6%. So clear evidence that diversification works.

Martin continued: “It is understandable that people will worry about the economic impact on their pension savings. The important takeaways from all this uncertainty are to make sure you know how much risk is being taken with your pension money and how well is it diversified. And, for more insight or advice on how to manage your pension, contact our Financial Planning team on (01) 204277400 or visit www.ifac.ie.”

Ifac has been at the heart of agriculture and food since 1975, providing a quality service and expert advice to its farming, food, and agri-business clients across the country. A top ten accountancy firm, ifac has over 30 locations nationwide and 500 people serving 22,000 clients.