Recent sharp falls in equity markets are bad news for pension funds. But the "experts" are advising pension fund trustees against any panic knee-jerk selling-off of shares. Their comforting contention is that equities are still the most appropriate long-term investment option for pension funds.

This advice could be dismissed on the grounds that "they would say that wouldn't they" since their own livelihoods depend on advising and administering pension funds largely invested in equities.

But what are the facts about equity performance? Should people be concerned about the recent fall in the value of the assets in their pension funds? With pension fund returns now at their lowest levels for more than 20 years, what do pension fund trustees need to know and do to ensure they get the best performance for their members? And is there anything the Minister for Finance could do to make things better for pension fund members?

A recent analysis from Mercer Consultants confirms the abysmal performance of global equities between April 1st 2000 - around the all-time high for most markets just before the technology bubble burst - and September 20th 2001: US equities went down 31.7 per cent, UK equities 29 per cent, euro-zone equities 38.4 per cent and Japanese equities 43.3 per cent.

Irish equities have fared less badly, falling by just 13.4 per cent, but Irish pensions funds are invested in a wide range of equity markets.

As a result, Irish pension fund returns have fallen sharply. Over the 12 months to end September, Mercer's figures show that the average return on pension funds has been a negative 18.6 per cent. That means that 100 invested in a pension fund in September 2000 is now worth just 81.40. Mercer says negative returns are not unique - returns were negative in 1990 (down 12.6 per cent) and in 1992 (down 7.1 per cent) - and markets have always recovered.

Since pension funds are long-term investments, trustees need to take a medium to long-term view especially in volatile market conditions. Because the latest poor 12 months follows a few years of very strong growth, returns look much healthier over a five-year time frame.

The Mercer figures show an annualised return of 11.1 per cent per annum over the five-year period to end September. Allowing for average inflation of 3.3 per cent over the period, the annualised real rate of return was just less than 8 per cent.

According to Mercer's, the primary aim of most pension plans is to achieve an annual return of 4 to 5 per cent above inflation and this has been comfortably achieved.

Historically, equities have always provided returns in excess of most other investments over a medium to long-term investment timescale. But those higher returns can be seen as a reward for taking greater risks, so equity investors must be prepared to accept some volatility. Trustees need to be aware of the risk/return trade-off and to establish with their fund managers the most appropriate investment strategy for their particular fund members. They must ensure that at least some of the surpluses generated in good years are maintained as a cushion to protect solvency in bad years.

Selling shares in a long-term investment portfolio into a falling market is a mistake because losses are then crystallised, the investor misses the bounce when markets recover and it costs more to get back into equities after the bounce.

How worried should pension fund members be about the fall in the value of their pension funds assets? It depends.

People in defined benefit pension schemes - the employer is guaranteeing a pension related to final salary - have least to worry about because the employer takes the risk of falling markets.

People in a defined contribution scheme - they build up their own funds and their final pension depends on the size of that fund - especially people coming close to retirement - have more to worry about.

Under current pension fund legislation they have to buy an annuity on retirement to provide them with an annual pension. This year's equity market falls will have reduced the value of the fund available to buy that annuity by about 20 per cent.

Because equities are volatile, trustees should always ensure their fund provides for members to move from equities into safer investments such as cash and bonds to protect the value of their funds as they come close to retirement.

The Minister for Finance, Mr McCreevy, could reduce the pressure on defined contribution scheme members.

He could change the rules so that instead of having to buy an annuity they could set up the Approved Retirement Funds already available to self-employed people and directors.

That move would remove the current inequities of treatment between employed people and those who are self-employed.