This month Ireland cashes in the Irish pound for the euro, and automatically changes the reference of the term 'domestic asset' to include the assets of all other participants in the euro. Matching domestic assets will now be euro-denominated assets. In addition, the introduction of the euro may force a shift in attitude where domestic competition will be redefined as arising from similar industries across Euroland. Pension fund performance may also be compared with pension assets across Euroland.
It is expected that the current exposure of Irish pension funds to Irish eq-uities will alter dramatically in the next few years. It is anticipated funds to Irish equities will be run down from their current level of between 25% and 30% to 15%. In addition, non-euro equities may also be run down in favour of euro equities. The trend towards euro assets may also continue at a more modest pace even after 2001 with an increase if and when sterling is swapped for the euro.
The above will enable Irish pension fund portfolios to reduce their stock specific risk exposure to the leading stocks in the Irish equity market and will allow the portfolios to have greater diversification. Traditionally, Irish portfolios have had stock specific ex-posure at around the 5% level for some leading stocks in the Irish market. Clearly, this is a position which some trustees would not be comfortable with in the long term.
At present, trustees and their advisors are addressing the issue of asset allocation and this is particularly relevant where benchmarks are in place.
Due to the immaturity of most Irish pension funds, asset liability modelling (ALM) would be carried out infrequently to say the least. Most funds have a reasonably young age profile with the liabilities for active members far outweighing those in terms of pensioners. This has led to pension funds having a high weighting in equities in order to match the salary related nature of their liabilities. As the liability profile of pension funds mature then ALM should become more prevalent. However, the growth in defined contribution schemes will also impact on the de-mand for such studies.
Joseph Byrne is deputy managing director / group actuary of Coyle Hamilton