IRELAND - Some Irish pension funds have seen such huge losses to their equity investments during the month of November it has now eroded all of the €9bn gains they would have earned this year, according to data presented by Mercer Consulting.

Pension funds are believed to have fallen by approximately 7% so in November, officials at Mercer say, as the Irish Stock Exchange has lost 15% of its value within three weeks, leaving the average Irish managed pension fund down 5% over the year to date compared with a rise of 4% to the middle of this year.

Noel Collins, senior consultant at Mercer, points out Irish pension fund returns have been hit particularly hard in November alone because it is a relatively small stockmarket with a high exposure to financial and housing-related stocks - markets which are beginning to suffer in Ireland either as a result of reduced demand for housing or because of the global credit crunch - and many pension funds are still heavily exposed to domestic equities rather than diversifying sufficiently.

According to Collins, around one-quarter of Mercer's Irish clients have between 0 and 5% exposure to Irish equities, but even in these circumstances they will have been hit by turbulence elsewhere, while another 25-50% of clients are moving into three-year exit programmes to reduce their domestic equity exposure closer to between 2% and 5%.

But with the ISEQ now down 28% in the year-to-date, pension funds could face significantly increased liability values and calls for more funding from stakeholders and sponsors, said Collins.

"In our view, these recent events highlight two key factors", said Collins.

"Firstly, it is important to have as diversified a portfolio as possible. Equities do give good long-term returns, but they can be very volatile, as we are seeing. Other asset classes can offer protection in such an environment, such as bonds and cash.  Additionally, non-traditional asset classes, for example commodities and infrastructure, can give returns which are not so affected by falling equity markets.

He further added: "Recent returns also show the impact of currency movements. The weak US dollar alone would have knocked about 2% off the value of a pension fund this year, which is why we advise our clients to have strategic currency hedging policies in place".

This is in relation to the average pension fund allocation of 14-15% in US equities, but hedging might have improved this by 3%, according to Collins.

Data from the Irish Association of Pension Funds (IAPF) pension fund survey revealed equities accounted for 63.4% of pension funds' assets, while the average Irish equity holding - across all segregated, unitised and insured funds - is approximately 11%.

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