Last year pension fund investment was still very much a story of equities. Overall, in 2006 equities accounted for 63.4% of pension funds’ assets under management, according to the Irish Association of Pension Funds (IAPF).

“Irish pension funds have a greater natural appetite for equities than pension funds elsewhere in Europe,” according to IAPF policy director Jerry Moriarty, “and it’s served well in the long-term in terms of returns.Schemes took a hit with equities but stayed in until they rose again.”

For example, An Post Superannuation Scheme, the pension fund of the Irish post office, returned 9.7% in 2006 from a portfolio that at the end of the year was 50% invested in global equities, 10% in domestic equities and almost 10% in ‘alternative’ emerging market and global small cap equities.

But the outlook is changing. An Post is now looking at its equities allocation with a view to increasing the allocation to equity alternatives such as global small caps and emerging markets.

“We’re looking at equities with an eye to reducing our exposure eventually to the domestic market - though not right away or all at once,” says An Post trust secretary Paul Dolan. “We’re not just going to react because of the fall in equity markets. We have a strategy and we intend to stick to it - but that doesn’t mean we won’t adjust it when necessary.”

“What changed is that people became more aware of risk - and of what the risks are,” says Moriarty.

The major dilemma for Irish pension funds has been whether to relocate equities allocations to bonds, and if so how much. Last year government bonds accounted for 17.4% of pension schemes’ invested assets while corporate and index-linked bonds dropped a percentage point to 2.3%. A report from consultancy Mercer suggested that corporate pension schemes’ funding improved 20% in 2007 because of increasing long-term bond yields, with a 12% fall in liabilities.

The percentage represents a €2bn reduction in schemes’ debt.

Yet Mercer also believes Irish pension funds are not necessarily locking in the gains.

Not all pension funds are convinced bonds are the way to go. Kevin Goss, pensions director at papermaker Smurfit Kappa, said a tri-annual strategic review of the fund resulted in liability-driven changes but decided against a proposal to increase its bond allocation. Instead, the fund allocated what would have been its bond allocation into the BlackRock Target Return fund, which has a bond overlay.

“We decided that the time was not right to be selling equities to buy bonds,” says Goss. “Bonds are more expensive and there isn’t enough protection to jump into bonds from equities.”

In contrast, Dolan says his fund is looking to tweak, if not reduce, its bond allocation. “There is always a fee issue if you’re not getting a return on your investment. But with bonds the market focuses the debate a lot,” he says. “If bonds underperform, the bond manager will be performing as badly as anyone else. In bad times, the market is as it is: if you make the benchmark, then you’re doing OK.”

Investment in alternative assets is on the increase among Irish pension schemes, from 0.8% in 2005 to 2.4% in 2006 - an indication that they’re catching up with an international trend.

“Pension funds are looking at alternatives and the big alternative for Irish pension funds has been real estate,” says Tom Geraghty, head investment consultant at Mercer in Ireland. “In fact, in the Irish context it wouldn’t be classed as alternative.”

Overall, real estate allocations increased slightly from 8% in 2005 to 9% in 2006, with non-European property up from 0.8% to 1.6%.

Smurfit Kappa increased its real estate allocation, exclusively in funds, from around 5% to around 10%. In the short term, the scheme is unlikely to increase it. “Property isn’t something you jump into and out of that often,” says Goss.

“Pension funds have had a very good experience with their equity allocations and they’re happy to park their alternative allocation in real estate, which has performed astronomically well,” says Geraghty.

“They haven’t had to go looking for alpha. That’s not to say it isn’t changing. There has been a significant correction in Irish equities and real estate is coming under pressure. The need is becoming more pronounced. But the governance issue, especially in terms of trustees’ decisions, is difficult to overcome. It’s an issue of legacy and experience.”

Across the Irish market, the issue is the still relatively low popular interest in pensions.

The Pensions Board - the Irish pensions regulator - reported an increase in 2006 in public awareness of Personal Retirement Savings Accounts (PRSAs) - tax-exempt Irish ‘stakeholder’ pensions - to 87% in 2006 from 60%, when the Pensions Board awareness-raising campaign launched in 2003.

Mary Hutch, head of investigations and compliance at the Pensions Board, describes actual uptake as “gradual”. She says: “The coverage has moved up, even if it is short of the target, but the saying that pensions are sold rather than bought has some truth in it.”

But Moriarty is concerned that the increase in awareness, especially among the young, hasn’t necessarily had an impact on take-up.

“People in Ireland tend to buy property when they’re young,” he says. Having a mortgage and other financial commitments means they put off the pension issue.”

The Pensions Board favours mandatory schemes. Failing that, the best option would be a dual strategy of pensions simplification and incentivisation, for example with the equalisation of tax incentives.

“The problem with [current] incentives such as tax relief is that they’re complicated and people don’t understand them,” says Moriarty.

A government Green Paper to be published later this year will outline first, second and third pillar options, and indicate whether pensions are to be incentivised or mandatory.

It will also likely indicate the place of pensions on Ireland’s political agenda.

The 2007 election saw the displacement of pensions minister Seamus Brennan, a significant champion of pensions. Yet the recent change of government and appointment of Martin Cullen as Brennan’s successor is unlikely to significantly alter the pace of pensions reform.

“The new government is very new indeed,” says Hutch. “Brennan was hugely instrumental in pulling forward the coverage debate and the new minister is committed to moving the pensions debate on. It’s high on the government’s agenda.”