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Irish regulator criticises DB schemes' investment strategies

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Ireland’s pensions regulator has warned that too many of the country’s defined benefit (DB) pension funds are pursuing narrow investment strategies and putting members’ benefits at risk.

Typical DB strategies seen by the Pensions Authority did not reflect the challenging investment environment, Brendan Kennedy wrote in the authority’s annual report for 2016.

“We have ongoing concerns about the financial management and the investment of defined benefit schemes,” Kennedy said. “This raises questions about the advice that trustees are receiving… Our view is that the calibre of the advice and the emphasis placed on different issues and aspects is not as good as it ought to be.”

The criticism comes as politicians have begun debating new rules to improve DB scheme protections.

Although Irish DB funds have reduced exposure to equities in recent years, Kennedy said this shift had “just about kept pace” with maturing liabilities, meaning overall risk had not fallen.

“Too many schemes appear to be invested on the assumption investment conditions will move in their favour in the short term,” the regulator said. “There is no doubt that if this comes to pass, the financial conditions of Irish defined benefit schemes will improve dramatically.

“However, an investment strategy designed to ensure surpluses in one very specific scenario means that the scheme will suffer losses in many other possible scenarios. Where such losses arise, the active and deferred members will bear a disproportionate share of the losses. I do not believe that such an approach to investment is consistent with the responsibilities of trustees.”

According to aggregate data released by the Pensions Authority last week, Irish DB schemes reduced their equity exposure from 35.8% to 32.5% in the 12 months to 31 March 2017.

Irish DB schemes' aggregate asset allocation

Source: The Pensions Authority

Kennedy also voiced concern that “too many schemes seem to be run solely by reference to a minimum contribution rate consistent with the funding standard”, rather than with a range of inputs and measures in mind.

“Given the increased maturity and predictability of many schemes, we would have expected to see close attention being paid to medium term cash flows, but we have seen little evidence of this,” he said.

Roughly three-quarters of DB schemes met the Pension Authority’s minimum funding level at the end of March. The 74% of schemes meeting the standard marked an improvement on last year’s figure of 70%, the Irish regulator reported last week.

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