How to Avoid Financial Losses For Pension Funds

There are two sides of the balance sheet of pension funds: the assets and the liabilities. A pension fund needs the assets in order to provide for the liabilities. The assets have been reduced substantially because of the financial crisis.

Thus the liabilities of many pension funds exceed the assets as the result of the crisis. Matters get worse if the liabilities of corporate pension funds increase because the firms dismiss employees or have their employees sooner retired from work. You can also get the best United Kingdom pension through various online sources.

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Many people might worry about their pensions as a consequence of the financial crisis. There are different alternatives. Either the stock markets experience a strong and sustaining recovery during the coming months and close the gap on the asset side or the pension funds have to take unpopular measures.

The employers and the employees could be forced to contribute more money to the pension funds or the pensions for the coming generation of pensioners could be reduced.

Securities lending as a risk factor

Big pension funds can finance their administration costs with the earnings from securities lending. The bankruptcy of Lehman Brothers has demonstrated that the risks of securities lending may not be underestimated.

Lent out securities to Lehman Brothers have vanished in the black hole of the bankruptcy. Prominent institutional investors struggle to recapture their lost securities.

How to avoid a gap on assets

We have attended boards of big pension funds. The most important rule of thumb is to provide for an enough big buffer of assets. The assets of a pension funds should exceed the liabilities at least for about 15%.

This buffer should be accumulated during normal times. This is a minimal buffer. A 20 percent buffer would be better but much more difficult to achieve.

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