In the third on his series on pensions ,Brian Williams looks at the performance of pensions in 2008 and why we should continue making contributions to ensure our security in the future.
Why did pension plans lose value in 2008 and does it still make sense to continue investing?
The global financial market started its decline in November 2007, attributed mainly to the credit markets getting roiled from sub-prime mortgages and derivatives. Local media attention to these events didn’t gain momentum until after Lehman Bros. collapsed in September 2008. The bankruptcy of Lehman Bros. is the largest bankruptcy filing in US history, with Lehman holding over $600 billion in assets. The Lehman collapse could best be characterized as a tsunami that ultimately created a global domino effect with governments, financial institutions, businesses and towns reaching near collapse and ruin.
Between September 2008 and January 2009, our Silver Thatch team met with hundreds of managers, business owners, and most importantly employees, as they had raised concerns as to the severity of the situation and the impact this was having on their pensions. We explained that the significant pullback in the global equities markets and heightened volatility in the fixed income markets, experienced during the last few months, meant that economies worldwide, including Cayman’s, would be in for a tough ride. We further communicated that while they were justified in being concerned that their retirement investments had lost value, history has taught us that in the long term, stock markets always rebound before the underlying economic conditions improve. To look at it from another perspective – consider that no matter how difficult the economy gets, we always believe that our house value will be worth far more in the future than it is worth today, regardless of if it is worth less today than when we purchased it yesterday. Time is an investor’s friend, and over 10-year rolling periods between 30 September 1988 and 30 September 2008, US Equities provided superior performance to cash and government bonds.
Investment managers island wide have the additional challenge of complying with local pension regulation that requires a minimum of 40% investments in equities and a maximum of 40% in fixed income investments. That’s not to say that during periods of significant volatility and market declines you should not be invested in the equity markets – even recent history demonstrates the viability of investment returns when periods of uncertainty are included. For instance, between 30 April 1989 and 30 April 2009, the S & P 500 (an index of 500 of the largest US companies) returned 7.66% annually for investors who remained invested for all trading days. If they missed the 10 best trading days, the returns would have been 3.97% annually; conversely, cash would have returned substantially less. Imagine, 7.66% annual returns even when we factor one of the most significant stock market corrections since 1929.
Finally, as the average age of local pension participants rises, it becomes increasingly important to plan financially for retirement. The average age of local pension participants is approximately 40 years old compared to 36 years old when the pension law came into effect in 1998. This suggests that employees have gotten older despite a substantial transient labour force. Cayman is one of the few jurisdictions globally that mandates an employer match 5% of an employee’s salary, up to a maximum of $3,000 each year. Stated another way, for every $1 taken from an employee’s salary, the employer contributes $1; that’s 100% of your basic contribution. Cayman’s National Pensions Law was designed to give every employee an opportunity to invest on a long-term basis towards their retirement in a new era of retirees living longer (life expectancy in Cayman is now more than 80 years old) and more active lifestyles.
Cayman’s National Pensions Law may seem strict to some, but in reality we have had to play catch up to the rest of the world. In the next 10 – 20 years Cayman will experience the benefits of this law when more retirees draw from their investments rather than draining the country’s coffers. The economy will stand to gain when hundreds of millions of dollars flows back into the system, and further promotes Cayman’s prosperity.
Brian Williams is CEO of Saxon Administration, the agents for Silver Thatch Pensions