The significant losses sustained by Irish pension funds over the last three years were commented on by Ireland’s minister responsible for pensions at the conference. Mary Coughlan TD said she was thankful that pension funds in Ireland are relatively immature and do not have the same requirements for income to match fixed liabilities as is the case with more mature funds. “This gives time for Irish funds to recover when the market turns.”
She said she had recently introduced short-term measures to allow the Irish regulator, the Pensions Board, flexibility to deal with pension schemes having difficulties with meeting the funding standard requirements for defined benefit plans.
“The intention is to give scheme sponsors financial breathing space to respond to the current funding difficulties and hopefully to reduce the need for employers to close DB schemes.”
She added that unfortunately the losses experienced by funds have brought a short-term focus on what is a long-term investment. “While it is certainly true that there have been losses, taking a longer term view, say the past ten years, funds have returned average annual gains of 8.7%.”
She also referred to the take-up of the recently launched personal retirement savings accounts or PRSAs, a low-cost vehicle designed to increase private pension coverage. She said she was pleased with the progress that had been made to date on PRSAs. The Pensions Board has approved a significant number of products and these have been coming to the market over the last couple of months, she said.
“Providers are also putting in a considerable advertising effort which I very much welcome.” This will help to raise consciousness and awareness in the pensions area, she added.
“We are working extremely hard to increase pensions overage by the voluntary route, however as I have said before if at the end of three years when we are required to review our strategy we find that the voluntary approach has not delivered the increase in coverage we require then other measures will have to be considered.”
The commissioners responsible for the investment strategy of Ireland’s E8bn National Reserve Pension Fund have decided about exposure to additional asset classes apart from equities and bonds,
Donal Geaney, chairman of the commissioners, told the delegates. “We have decided in principle to invest in corporate bonds, small-cap equities, public-private partnerships and property.”
Work is currently underway to devise the appropriate entry strategy. The fund is also looking at absolute return models. “We will be looking at how the fund might access these.”
Geaney conceded there had been a lot of debate about the NRPF’s weighting in equities as a result of market performance over the last three years. “To date the fund has only obtained 10% of its projected total income to 2004.” So the fund is well below its targeted exposure to equities, he pointed out.
“A simulation exercise by the NTMA [National Treasury Management_Agency] estimated that equities now purchased by the fund would not have to be liquidated until 2035.”
“For equities to underperform bonds on a 30 year view, it would be necessary to hypothesise a scenario where, over that time period, the return on invested equity capital did not exceed its cost. “Should that scenario come to pass it is hardly likely that the fundamentals of capitalism would have failed. Though this may be remotely possible, the commissioners did not feel it would be sensible to plan for it.”
He hoped future generations would not judge them too harshly for their failure to forecast the end of the capitalist system.
Geaney defended the commissioners’ decision to ‘average-in’ their entry into the investment marketplace in 2002 rather than just “closed their eyes and jump in”.
They took market soundings among a number of strategists who expected the market to rise on average by some 13% in 2002. They decided to delay market entry until the appointed managers were in place and accepted the NTMA’s advice to ‘average-in’ over time. “Over the year we held an average cash balance of one third of the fund’s value, ending the year with 25% in cash.”
This helped to mitigate some of the worst effects of the bear market performance, he said. Since launch in April 2001 the fund had performed “relatively well”, he said compared with the average Irish managed fund.