A day at the races
While many larger, unionised companies in Ireland have maintained their defined benefit (DB) schemes, privately-owned building firm John Sisk & Son took action to shift the risk element towards its staff – well in advance of the recent stock market turmoil.
The company runs two DB schemes: the executive scheme was set up in the late 1960s; the staff scheme followed in the mid-1970s. The executive scheme has a value of E35m and a membership of 65 while the staff scheme has a value of approximately E15m and a membership of around 200. Both were closed to new members in 1997; DC schemes were offered to those who joined after that time. The value of the DC schemes stands at around E10m at present.
The introduction of DC schemes for new members was clearly a timely move when one considers the losses that were experienced subsequently by the company’s DB schemes. At the end of 2003 they had a combined deficit of E10m. “We have pumped in significant amounts of money over the last number of years,” says group finance director Conor Dunne. “By 2006 they will be fully funded under FRS17.”
The benefit to the company of switching to DC scheme is clear. Dunne notes, “if the manager blows the money on a horse everyone shares the pain.”
The stock market losses have impacted on investment strategy within the DB schemes, as has one other important factor: age profile.
The two DB schemes are managed separately. The reason is that the executive scheme has a more mature profile than the staff scheme and thus is less able to tolerate risk.
The other way in which age influences the investment strategy, as Dunne explains, is that “when you’ve got a fund that is closed to new members and the profile is just getting older you have to be more prudent”.
At present equities account for 60% of the executive scheme; the staff scheme has an equity content of 70%. Three years ago the executive and staff schemes had equity contents of 70% and 80% respectively.
The more prudent view is also evident in the shift that has taken place within the equity portfolios. “Following the poor performance of equities we have moved away from the far east into more traditional defensive stocks,” says Dunne. “We also steer clear of hi-tech, emerging markets and anything that has just been launched on the Nasdaq.” All this at a time when other schemes in Ireland are hanging on to their risky assets in the expectation that they will bounce back as the market recovers.
Meanwhile the bond portfolio is exclusively government-sourced. “There are no corporate bonds,” says Dunne. “We have traded very safe, but secure.”
He adds: “If we move the clock forward, the DB schemes, especially on the executive side, will only contain bonds.” The aging profile has also influenced investments in real estate. Its share of the pension portfolio is declining: a few years ago it accounted for 17% of total assets and now it represents around 7%.
“The property market has peaked,” says Dunne. “The cycle is about 30 years, and that’s fine if you have a long term scheme that is open. But when you’ve got a mature scheme that is closed and you need liquidity you may have to sell the property at a loss.”
The current funding deficit makes the measurement of performance critical. The trustees and their consultants Mercer meet with the investment manager four to five times a year to discuss investment performance and agree criteria for the investment policy.
Other than excluding certain equities, the policy incorporates a benchmark of 1% over Combined Performance Measurement Service (CPMS) median for the equities portfolio. The CMPS is basically the equivalent of the CAPS benchmark used in the UK.
For the bond portfolio the long-term bond rate is used. Benchmarks are Sisk’s preferred method of performance measurement. Dunne notes: “At least with the benchmark there is something to measure the manager’s performance against.”
The recent underperformance of KBC, which manages both funds on a segregated basis, means that its days as managers of the Sisk funds are numbered. Last year the funds achieved a combined return of 13% but before that, as Dunne notes, “it was minus, minus, minus”.
He adds: “We moved to KBC when they were the best performing managers. Now they are in 18th place out of 18 managers in Ireland. So they’re not very popular at the moment.”
Sisk has already started looking to other managers. When it put in extra funding recently it gave the bond funding to Bank of Ireland Asset Management. Dunne confirms that “the Bank of Ireland will manage bonds and some equities”.
From now on two managers will be used instead of one; this will diversify the risk. Each manager will run a segregated fund and each of these funds will contain the assets of both schemes. The decision on a second manager is due to be finalised shortly.
With E50m of pensioners’ money riding on the new managers, the stakes are high.