“19 October 1987 saw the biggest global stock market crash ever and became known as Black Monday. It is difficult to believe that was 30 years ago. The UK stock market lost over a third of its value in a matter of a few weeks. These falls didn’t just occur in the UK, they were replicated around the world.
“Pension schemes were in unprecedented territory, this hadn’t happen before and while the impact on the assets held by pension schemes was huge, it had only a small impact on their funding positions. Most pension schemes had around 85% of their portfolio invested in equities but unlike now, liability hedging just didn’t exist and schemes saw their assets fall by 25-30% in just one month.
“Funding was very different to today, the scheme actuary would simply adjust down the value of the liabilities by a similar amount. Coupled with companies often setting the contribution rate, any contribution holidays could continue. It took about 18 months for the UK stock market to recover and in fact doubled within about 8 years. Pension scheme contribution holidays also continued for many years.
“If the same thing were to happen today, pension schemes’ assets would be in a better place, investment portfolios are structured very differently and liability matching is in place. However, funding positions would likely be worse because of the funding approach (“gilts plus”) commonly used today. Schemes need to think carefully whether this approach is appropriate for them or not – there is no single right answer. This is the important piece in the jigsaw, when we advise clients we need to fully understand what they want their pension scheme to deliver and we work with them to achieve it. Managing risk is very important and part of that is planning for many scenarios.
“I hope I never see another Black Monday, the sector has changed and in many ways evolved for the better since then. Schemes better understand risk, but more could still be done - I am sure understanding, and hence strategies will continue to improve for the next 30 years.”
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