IRELAND - Pensions trustees were "actively reducing investment risk" during 2007, as 28.5% of assets were held under passive management and there was a 2.8% reduction in exposure to Irish equities, the Irish Association of Pension Funds (IAPF) has revealed.

Findings from the IAPF's annual asset allocation survey showed the value of Irish pension fund assets dropped1.3% to €86.6bn from €87.7bn at the end of 2006, which is "in line" with expectations following the market conditions over the past year, said the body.

That said, although the situation has been "further exasperated" by significant falls since the start of 2008, the survey pointed out the total value of assets managed by Irish pension funds has almost doubled since the end of 2002 from €44.8bn.

That said, Patrick Burke, chairman of the IAPF, claimed the results of the survey indicated where possible pension fund trustees "have been actively reducing investment risk over recent years".

For example, he pointed out for many years the strongest performing equity region for pension funds has been the Irish equity market, however in 2007 allocations to this sector fell by 2.8% to 8.2%, which the findings attribute primarily to the market performance during the year.

Although, the research highlighted the exposure of Irish pension funds to domestic equities has dropped by almost 40% since the end of 2002 - when 13.2% of assets were in Irish equities - instead investments in the Eurozone region increased to 21.1%, while allocations to UK and US equities both rose one percentage point to 7.1% and 14% respectively.

In addition, the survey findings highlighted a steady increase towards a passive rather than active management approach, with the proportion of assets under passive management rising from 25.9% in 2006 to 28.5% in 2007.

Research also showed while the overall allocation to equities increased slightly from 63.4% of assets under management to 66.4%, more "noteworthy" was the increase in the percentage of funds holding bonds with a duration of more than 10 years from 27.3% to 42.1% over the space of one year, which the findings suggest is a result of targeting a closer match to their liabilities.

Burke commented: "Given the long-term nature of pension scheme liabilities, this increase shows positive action on the part of pension scheme trustees to reduce volatility and to assume the challenges of liability-driven investing (LDI) in a straightforward fashion."

The findings also revealed the overall allocation to property was "virtually unchanged" at 9.1%, while investment in alternative assets - including forestry, private equity, direct currency, tactical asset allocation and derivatives - remained steady at 2.3%.

However, the IAPF suggested that as access to alternative asset classes, such as hedge funds, commodities and emerging markets, becomes more efficient, the small existing allocation by Irish pension funds will increase as trustees continue to better manage risk and diversify away from traditional asset classes.

It pointed out the widespread closure of DB schemes to new members, and the resulting increase in the maturity of members, will "fuel a continuation of this de-risking and diversification agenda with an increasing emphasis on LDI and diversification through alternative asset classes".

At the same time, the IAPF acknowledged recent market losses "may slow down" the expected overall reduction in equity weightings - in favour of bonds - as trustees may prefer to wait for a return of higher equity valuations rather than "crystallising losses suffered over recent months".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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