Pension Funds and the Stock Market

Readers Question: I do not understand. You say the govt borrows from pension funds but I read in the press that such funds are in jeopardy because of the credit crunch, so how can they lend money?. They NEED money (From: Who Lends the Government Money?)

Pension funds collect monthly payments from its policy holders and invests the money on their behalf. The hope is to give pension fund holders better growth than if it was kept in a bank account. This investment funds are then used to pay pension annuities when people retire Pension funds will invest in a variety of different areas. – Stock Market, government bonds, gold. They will try to spread the risk of their investment, but, traditionally the stock market offers the best return on investment.

However, in the past couple of years, and especially this year, the stock market has fallen substantially. This has meant many pension funds have seen their investments fall. Therefore, they are short of money to meet the payouts of existing pensioners. Because their investments have fallen in value it means future pension payouts will have to be smaller. Therefore, even though many people don’t own shares directly. The falling stock market does affect many more, especially those who are soon to retire. In times of economic uncertainty and falling share prices, government bonds offer reasonable security and a fixed interest payment. Therefore, they may be inclined to switch their investments from shares to government bonds. The government will certainly be hoping so as they will need to be selling more bonds to finance the growing deficit.

Economic Effects of stock Market