IRELAND - Irish pension funds could benefit from the collapse of the euro-zone, even if it increased the country's rate of inflation, LCP has said.
Outlining its theory in a briefing note on the euro-zone debt crisis, the consultancy argued that the disintegration of the fiscal union - alongside individual member states returning to their respective national currencies - would benefit the country's schemes, as these would then hold their assets in currencies stronger than the relaunched Irish currency.
"Consequently, any assets held in these stronger countries would immediately increase in value when converted back to the new Irish pound," it said, adding that, because pension payments would likely be made in the new currency, it would result in liabilities falling compared with asset value.
The briefing suggested that leaving currency exposure unhedged would in such a scenario be a "further source of return", while it also highlighted the possibilities of diversifying into sovereign debt outside the euro-zone - citing the remaining AAA-rated nations and regions of the UK, Australia, Canada and the Scandinavian countries as investment destinations.
It further cited diversified growth funds, as well as emerging market multi-asset funds and absolute return bond funds, as potential investment options for schemes looking to alter their asset allocation.
However, the consultancy did not ignore the potential downsides of such a collapse, citing research by UBS that estimated a cost of 40-50% of GDP if the single currency were to cease trading.
It further noted that there would undoubtedly be a drop in the country's living standards, as inflation rose in line with the increased cost of exports - an issue likely to also affect scheme sponsors.
"It is also important to take into account the impact on the business of the pension's sponsor, whose business in Ireland will be impacted," the note said.
"The strength of the employer's covenant could be weaker or stronger depending on the nature of their business in Ireland."