First, we need to dispel a common myth. The economy and the financial markets are not the same thing. The economy is a term used to describe the financial health and prosperity of a city, state, or country and defined by its production and consumption of goods and services. The markets, such as the Dow Jones Industrial Average, S&P 500, Nasdaq, and Russell 2000, are places where shares of the companies which make them up are traded. The markets rise and fall based on the prices of the underlying company stock. While each can affect the other, they also move independently. For instance, historically, the markets have typically recovered more quickly than the economy after a recession or depression. Even now, our stock markets have recovered and reached new highs since the Great Recession, but our economy is still struggling to get back on its feet.
If you opted to participate in the pension plan, you won't have an exposure to market risk so your nest egg that you've accumulated after 25 or 30 years won't fluctuate with the rise and fall of the stock market. It is, however, subject to interest rate risk caused by inflation. Inflation is the rise in the cost of good and services over time even though their value hasn't changed. A Hershey chocolate bar that you're buying today is no different than it was twenty years ago, but the price has increased from 50 cents to 99 cents. The change in cost without change in value is the definition of inflation. Movie tickets, haircuts, and bacon are just examples of the things that have changed over the years and will turn you into your grandparents. "I remember when it was called an iPod. It didn't have a fancy phone or the internet and it only cost $300. I used to listen to it on my walk to school which was uphill both ways in the snow."
You may have a Cost of Living Adjustments (COLA) with your plan. "Pension Plan members will earn a 3% COLA for all service prior to July 1, 2011. Any retirement service earned on or after July 1, 2011 will not be subject to a COLA." (myFRS Cost-of-Living-Adjustments) If inflation increases beyond 3%, your pension benefit will lose value to inflation. The dollar amount of your payments will remain the same, but as inflation increases and you require more dollars to purchase the same goods and services, your monthly check will slowly erode. Social Security may help to alleviate part of this issue. In order to avoid this loss, your retirement income must at least meet the rate of inflation.
If you're involved in the investment plan, you will be subject to the same risks as the investments which you're involved. These risks can include economic and inherit market risks as well as many more types. You may also have a better chance to meet or even earn a greater rate of return than inflation.
To find out how far your assets might take you and how much of a bite inflation might take, contact your financial advisor.