A TEN per cent loss shown in the Balanced Portfolio of the Falkland Islands Pensions Scheme (FIPS) generated concern amongst members when they received their statement last week.
Speaking to Penguin News, Chair of the Scheme Drew Irvine assured however that “a loss is not unprecedented.”
He explained it had happened three times in the last 11 years “and we have seen the fund recover over time. It is a long-term investment where members can be making contributions for over 40 years. What happens in one particular short period is unlikely to make a big difference to the overall fund value by retirement.”
On Wednesday Penguin News talked with Mr Irvine along with Financial Secretary James Wilson and FIPS Secretary Diana Aldridge, about how the fund worked and how such losses occur.
Mr Irvine said: “You will always see a degree of volatility on equity funds but the reason most of the money is invested in them is that over the long term they have performed better than other asset classes. I have to caveat that as we can’t predict the future but certainly historically equity funds over the longer term have outperformed other types of investment.”
There are five investment funds in the FIPS, two equity, almost completely invested in the stock market, and two bond funds and one cash fund – the three latter are less volatile but don’t perform as well as an equity fund.
But why the volatility?
Mr Irvine puts some of it down to Brexit. The potential of a trade war between China and the US and the threat of global economic slowdown also contributed. He said: “You do find the markets react quite badly to uncertainty and over the last few years we have seen significant uncertainty over Brexit and that’s not going to change in the short term - we are no clearer now than we were two and a half years ago what the outcome is going to be.”
However he reminded that pension funds are long term investments with shorter term losses offset by longer term gains.
Was the 10% loss more than is usually suffered, we asked
“No it’s not,” said Mr Irvine. “The biggest recent loss was following the 2008 banking crisis where the balanced portfolio lost 21%. In 2018 we were looking at a 10% loss. But gains made in the following years offset the losses and members benefit to some extent by purchasing units at lower prices. If you look at what’s happening this year, since the end of 2018 the gains made in 2019 exceed what was lost last year.”
He continued: “2008 was a poor year but since then investments are worth more than they were before that time. There was a loss in 2011 as well and in 2000 with the Dot Com crash but markets subsequently recovered.”
How does the Falkland Islands Pension Scheme work?
Financial Secretary James Wilson explained that the ‘defined contribution scheme’ has been in existence since 1997, “…contributions are put into a pool of investments but each individual member of FIPS has their own individual account.”
There is a piece of legislation called the Falkland Islands Pension Scheme Ordinance 1997 which defines the rules of how the scheme should operate both in its governance – so in terms of Drew being the Chair of FIPS - and administration of the scheme. FIPS is legally separate from the FIG but it so happens that FIG does some of the administration of FIPS, which is Diane Aldridge’s team, and some of Mr Wilson’s time.
The legislation provides that the FIPS Board invests members’ contributions and ensure that the accumulated benefits are provided to members.
“So the way to do that is using a fund manager,” said Mr Wilson. The company is called Fidelity. “We set a target of what performance the FIPS board wants them to achieve. So that means they are incentivized to get a good performance because they are compared against a target (a benchmark).”
In addition, the FIPS Board buys in an independent review of how Fidelity is performing. “So in headline terms you can compare it against the benchmark which is how all the other stocks and shares in the world are doing depending on the funds that Fidelity has invested in,” explained Mr Wilson.