Like the Irish economy itself, Irish pension funds have gone from strength to strength in recent years.
And the pace of growth is stepping up.
In 2005, the last year for which figures are available. Irish pension funds grew in size by 25% compared with the year before, to €77.9bn. This was their best performance since 1997, according to the Irish Association of Pension Funds (IAPF).
Overall, equities still dominate pension fund portfolios. According to an analysis carried out by the IAPF, they accounted for 65.0% of assets under management at the end of 2005, compared with 63.1% at end-2004.
However, the report notes: "This rise may camouflage a strategic move away from equities as, given the outperformance of equities relative to other asset classes during 2005, this proportion could have been expected to increase to around 66%, based on performance alone."
Within that allocation, there is still a fairly high percentage of Irish equities - 11.4% of total assets - but that again masks a possible downward trend.
"What we have seen is a slight reduction in Irish equities, but nothing to what might have been expected since the introduction of the euro in 2000," says Tom Geraghty, head of investment consulting, Mercer in Ireland. "The Irish equity allocation then was about 30% of the portfolio. The current level is still a sizeable allocation, bearing in mind that the Irish market is under 1% of global equity values. Of course, while most of the pension funds' liabilities are in Ireland, the euro also applies to continental Europe."
In fact, the figures show that other euro-denominated stocks make up 17.4% of all assets.
"In reality, the broader splits between euro-denominated investments and those outside the euro have not changed," says Geraghty.
"Most funds have got reasonably high levels of Irish equities and are trying to manage it down," says Joe Byrne, deputy managing director, actuaries and consultants Coyle Hamilton Willis and also IAPF chairman. "However, because the Irish stock market has done well, the weighting is increasing."
After Europe, the most popular region for equity investing is the US, making up 16.0% of portfolios. The UK component is the fourth biggest, with 7.7%. The allocation to Japanese equities is 4.4%, up from 3.6% in 2004.
However, despite their disenchantment with equities, Irish pension funds have not dived headlong into bonds. The overall proportion of assets held in fixed interest and index-linked bonds dropped from 23.5% at end-2004 to 21.5% at end-2005, according to the IAPF. However, the report notes that this drop is largely attributable to the underperformance of bonds in relation to equities and property during the year.
"The bond weighting is quite light compared with the long-term benchmark, because people are taking a punt on interest rates rising," says Byrne.
"That has worked out quite well. The average Irish fund had an allocation of around 13% to bonds last year, compared with 21.5% in 2005 as shown in the IAPF survey. Of course, from a liability matching point of view, the allocation should be far higher. So there is a fair amount of risk, in that assets and liabilities are mismatched."
But according to Joseph O'Dea, senior investment consultant, Watson Wyatt (Ireland), the larger Irish funds have slightly increased their bond allocations.
"In spite of their expense, bonds are still used to match assets with liabilities," he says. "We have seen large funds using structured products and derivative-based strategies to do this."
Alternative assets have never really caught on among Irish pension funds and the survey shows that little has changed: just under 1% of portfolios were held in ‘Other' assets, which includes alternatives.
"It is partly a question of size," says Byrne. "To have a decent investment you need to put in €25-€30m. So you need a €1bn pension fund. If your fund is worth only €100m, a 3% allocation, say, is €3m, and something that small isn't really worth it."
That is not to say there is a complete lack of interest, however, according to Geraghty.
"Pension funds are looking at alternative asset classes, although my experience is that there has not been a significant take-up so far," he says. "However, alternatives will become more widespread. Trustees have been disappointed by the returns from active management in mainstream equities over the past few years. So they are looking at, for instance, global tactical asset allocation, currency overlay, small caps and emerging market equities. They see it as worthwhile to pay for active management in this area, if that means they are going to get outperformance."
"Use of alternatives is relatively slow," agrees O'Dea. "At present, there is a certain amount of scepticism, as well as a lack of governance resources. And trustee boards are cautious about the pace at which they are prepared to accept new strategies."
But O'Dea sees interest accelerating.
"Awareness is gradually increasing, and over time, people become more and more familiar with the concept. That is helped by large funds buying into them, for example, the National Treasury Management Agency. That means trustees will be comfortable with doing something similar themselves."
And he also predicts that managers will eventually launch pooled funds, containing combinations of different alternative assets.
"Those could be available on a stand-alone basis or put into existing managed funds. That way, alternatives will gain familiarity and acceptance."
In contrast, Ireland has always had a strong affinity with property. And according to the survey, pension funds increased their allocation to property from 7.4% of their portfolios in 2004 to 8.0% in 2005.
"Irish property has done phenomenally well, giving double-digit returns over the past 10 to 15 years," says Geraghty. "There has always been a significant weighting towards Irish property across most pension funds, as it is ingrained in the psyche of Irish investors. It is held predominantly through pooled funds, although some large pension funds have direct holdings."
"Overall, we are seeing funds add to their property allocation," agrees O'Dea.
However, he says that European property investing is becoming increasingly popular, compared with investing in Ireland. He says that one reason is the relatively high rate of Irish stamp duty - 9%- while another is that European property has performed "staggeringly well".
One trend highlighted by the IAPF is the recent trend towards passive management. It says: "Throughout 2005 this trend continued, although at a slower pace than in 2004. By the end of 2005, the proportion of assets under passive management rose to 27.8%, compared with 25.8% at the end of 2004."
Over the past few years, however, the shift has been remarkable. At end-2001, the split had been 90:10 between actively and passively managed assets. The passive segment has therefore almost tripled in percentage terms.
"Some funds used to have 100% segregated management, but they are now using some unitised exposure to the index," says Byrne. "A lot more sophistication is coming into the market as to how people use their risk budget or take risk."