Volatility is a fact of life when you invest. It doesn't matter where you invest, whether it's real estate, stocks, or bonds; they're all volatile, more or less. Clearly, stocks are more volatile than other instruments, like fixed income, but fixed income in recent years has been very volatile as well.
That's a curse, but it's also an advantage. That's how you're able to make money most of the time—you are paid for volatility. Generally when you invest, you want to be paid for the risk that you take. You have to be careful about this. To limit the percentage of stock that pension funds can invest in may appear to be the right thing to do today, but over the long haul, stocks have outperformed fixed income significantly. To my mind, you can use other tools, like the tool that was mentioned by Siim, in smoothing the value of the asset. I'm surprised that he hasn't recommended that the surplus of a pension fund should not be limited to 10%, but should be much higher. If we had done that in the nineties, I don't think most pension funds would be in the same trouble they're in today.
In the U.S., where's there no limit on the size of the surplus, a pension fund like GM's is still in good shape. At the peak, the assets were 175% of the liabilities. With a limit of 10%, it's impossible to manage a pension plan. You need a much wider band. I would not limit the investment that pension funds can make in stocks or any other type of investment, and I would leave it to each board to decide what is the best for them.