Into a new era
The long-awaited Irish Pension Bill was passed in March, establishing a new legal framework that includes the creation of Personal Retirement Savings Accounts (PRSAs), amendments to the occupational system and the introduction of a pensions ombudsman with power to investigate any complaints against occupational plans.
The PRSAs, similar to the UK stakeholder system, will now replace some existing pensions vehicles and target those not covered by occupational schemes, as well as open the market to providers other than life insurance companies.
The bill was one of the most significant, and most welcome, developments in a year when market underperformance increased concerns among institutional investors regarding the future of their schemes.
According to data from Mercer Investment Consulting, Irish pooled pension funds lost 10% of their assets during the second quarter of the year, which reduced the three-year returns for the pooled pensions sectors to zero. However, Mercer also says that the asset value of a typical Irish pension fund at the end of June was the same as it was at the end of September last year, and the drop experienced during the second quarter only cancelled out the rebound in the markets experienced in the fourth quarter of last year, so there are still reasons to be optimistic.
Another topic that hit the headlines in recent months has been the €7bn National Pensions Reserve Fund (NPRF) and its tender process to select managers, which attracted interest from investment and pensions professionals around the world. The National Treasury Management Agency (NTMA), the body in charge of the fund’s investment strategy, received 600 applications from around 200 institutional investment managers in response to a request for proposals issued in July last year. The first mandates were awarded at the beginning of the year.
There had been a lot of discussion about the extent to which these mandates would go to foreign providers or stay in Irish hands. The final line-up was a mixture of both. In January the NTMA appointed Barclays Global Investors to manage a total of e1.8bn in Euro-zone and North American passive equities, as well as Bank of Ireland Asset Management and State Street Global Advisors to run a €1.1bn Euro-zone passive equities mandate. In March, more appointments followed, including two e420m global equity mandates awarded to Capital International and Dresdner RCM, and three e350m pan-European equity mandates going to Bank of Ireland, Blackrock International and Putnam Investments. Other names, such as Invesco, Schroders, JP Morgan Fleming, Daiwa, Irish Life, Lord Abbett and Goldman Sachs, were also appointed to manage several mandates during the tender process, which also included the selection of a custodian and a transition manager. A €1.1bn passive Euro-zone long bond mandate will be managed in-house by the NTMA itself.
The future development of the NPRF and its investment strategy will be closely watched during the years to come. But other issues are also keeping the industry busy. A recent report published by the Irish Association of Pension Funds (IAPF) warns that the current level of contributions to defined contribution (DC) schemes are unlikely to be sufficient to provide adequate retirement benefits, calling on employees to top up their pensions with additional voluntary contributions.
According to the report, early retirement is also becoming more popular in Ireland, with the normal retirement age in 14% of defined benefit (DB) schemes being 60 or below. For DC schemes, this figures rises to 33%. The IAPF believes that on current contributions, investment returns and life expectancy, this move to early retirement is unsustainable. Even though at present around seven in 10 schemes are run under a DB system, the move towards DC is accelerating, and members will have to consider very seriously to increase their contributions or retire later.
But practically all news schemes are DC. Last year, there were 71 fewer DB plans and 11,645 new DC schemes. Now the numbers covered by DC and DB schemes are nearly equal, amounting to 220,000 in each. There are worries that the new PRSAs will damage DB plans and special rules apply to changing over to these.