Ireland rethinks its policy
The market value of Irish pension scheme assets is more than E41 billion but by international standards, the average size is very small: about E130m for a defined benefit scheme and E6.5m for a defined contribution scheme. In view of these figures, from a survey by the Irish Association of Pension Funds (IAPF) in September 1999, it is not surprising that a global balanced mandate has been considered the most practical style for investment managers.
The performance benchmark has focused on peer group comparison. This is provided by pooled fund surveys, issued monthly, and the Combined Performance Measurement Service (CPMS) for segregated accounts, calculated quarterly (since the beginning of 1999). It is planned that from June 2000 it will be calculated monthly.
Until recently, the trustees of larger schemes that chose to split the investment mandate did so by appointing two or more domestic managers, each with the identical peer group benchmark. This led to a very inward-looking and self-conscious investment management mentality. It also led to the popularity of passive investment, where the manager adopts the same asset distribution as the average of all managers in the survey, and rebalances regularly according to the published data.
While there is scope for the manager to add value within the asset class, this approach leads to pension schemes achieving average results. Since this strategy meant trustees are protecting their scheme against the risk of bad performance, they found it highly attractive. This led to huge growth, and this approach now accounts for between 5% and 10% of pension assets under management in Ireland.
The creation of the euro is also affecting the asset distribution of Irish pension schemes. This is most apparent in the shift in exposure to Irish equities, which has fallen to below 25%, compared with an average weighting of 35% at end-1997. It is likely to fall further in the next few years ,with many people predicting it may settle at about 10% to15%. Some argue that it will drop much lower, as Irish equities represent no more than 1% of the capitalisation of Europe’s stock markets.
Trustees, investment managers and consultants agree that the reduction in Irish equity exposure should be matched by an increase in Euro-zone equity content as pension funds’ asset distribution adjusts to the new “domestic” market. It is therefore surprising that this process is moving so slowly.
The 3% increase in the Euro-zone (ex Ireland) exposure since end-December 1997 compares with a 4.9% increase in the exposure to global equities (ex Euro-land) over the same period. These asset distribution changes show the fundamental rethink on investment policy that is occurring in Ireland.
Many schemes are looking at the concept of establishing a core passive portfolio and defining two or three specialist mandates in Euro-zone or European equities, global fixed interest, global (ex-Euro-zone) equities etc. This is most prevalent with larger schemes, which previously may have split the mandate between two to four domestic managers, each providing a global balanced portfolio benchmarked against the peer group.
The restructuring of mandates along core/specialist lines has brought Irish fund managers into direct competition with overseas managers. In general, Irish managers have weathered this competitive storm because:
(i) their performance record in managing non-Irish equities is quite strong; and
(ii) several Irish managers can show that they have access to global research capabilities.
Pension scheme assets in Ireland look set to grow, as its young labour force makes provision for retirement, encouraged by new legislation expected in 2000.
The creation of Personal Retirement Savings Accounts (PRSAs) will give individuals access to a flexible, portable and widely available pension product. People will want to be choose from a suite of specialist funds and determine their own tailor-made asset allocation. While a managed or global balanced fund will be among the options, clearly the growth in PRSA pension assets will help shift the emphasis towards specialist mandates.
Government moves announced in July 199 to fund social welfare pensions will also boost pension assets. Two funds will be set up, that are estimated to reach about E6.0 billion by end-2000.
John Conway is director of business development at Montgomery Oppenheim Investment Managers in Dublin