Falling yields hit Irish pension funds as investors flee to 'quality'

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  • Falling yields hit Irish pension funds as investors flee to 'quality'

IRELAND - Irish pension funds have seen losses of 1.2% in July, with schemes suffering from the uncertainty surrounding the US debt ceiling and euro-zone debt crisis, according to Aon Hewitt.

Speaking to IPE, Denis Lyons, senior investment consultant in Aon Hewitt's Dublin office, acknowledged that Irish pension funds were "of course" globally diversified, meaning they were exposed to overall market conditions.

"In terms of the equity, most Irish pension funds would be investing globally now rather than having a particular overweight to Irish or even euro-zone equities," he said.

"In terms of bonds, it would be a spread of euro-zone government bonds to take account of core/periphery," he added, explaining that this was down to the schemes needing to match their liabilities - still based around euro-zone government bonds, despite the introduction of sovereign annuities.

"The sovereign annuity was an idea in terms of alleviating funding pressures by allowing schemes to invest in Irish government bonds, allowing them to benefit from the higher yield - but it's safe to say that's on the back burner for the moment," he said.

He said most funds had instead decided to invest in line with the Merrill Lynch 10-year index, while some schemes were specifically looking only for exposure to core euro-zone countries, such as German, French and Dutch bonds.

However, this "flight to quality", as Lyons branded it, led to a drop in Bund and French OAT yields, impacting scheme funding.

"Defined benefit plans suffered as falling bond yields saw the minimum funding standard liabilities increase," he said. "Combined with declining asset values, schemes' funding levels came under renewed pressure in July."

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