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The Actuary The magazine of the Institute & Faculty of Actuaries
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Pension funds should remain from rash response to volatile markets

Since the end of July equity markets have experienced significant volatility and although corporate yields have been reasonably stable over this period, credit spreads have risen in response to increased market uncertainty.

According to Mr Sweeting, head of JP Morgan Asset Management's strategy group, in the UK the typical pensions plan might have seen its funding level - the ratio of assets to liabilities - fall from 93% as at 31 March to around 85% as at 10 August 2011. Most of this fall has happened in August where the funding level for an average scheme would have still been around 91.5% (as at end of July 2011).

Mr Sweeting said: "It is understandable that market volatility causes significant concern for pension schemes but the current market moves highlight the importance of diversifying return-producing assets rather than focusing on short-term fluctuations. Within equities, it is important to diversify across a range of markets, including emerging markets; and it is important to consider exposure to other sources of return, such as commodities, infrastructure and areas such as insurance-linked securities."

Mr Sweeting continued: "Whilst it is difficult for pension schemes to determine the direction of the market on a day to day basis, markets do tend to move through cycles of higher and lower volatility - and at the moment we are in a period of higher volatility."