Fennell Betson reports on the preparations for EMU
For the Irish the question of European Monetary Union is one of when - not if. This reflects the political consensus in the country, which focuses on Ireland being an EMU member from the start.
Those responsible for pensions schemes are becoming aware of the need to recast their thinking from the narrow confines of the green of the Irish punt to the broader blue of the Euro. For some this will be a sea-change.
At the famous Dublin department store Arnotts, treasurer Derek Browne sees EMU as a challenge for the long-established fund, with Ir£100m ($150m) in assets and over 600 members. It is not just a matter of the fund being denominated in Euros, we will have to become more aware of other European investment opportunities. We are trying to get a handle on the impact for us." The scheme has had very good returns from administering its own assets, of which practically 90% are invested in Ireland. "The balance in non-Irish and UK assets is handled by two fund managers in Dublin."
About 50% of the portfolio is committed to Irish equities, where the trustees took a decision some years ago to concentrate their holdings on a core of large companies, particularly the financials. "We used to be active managers, buying and selling stocks, but we disposed of everything except these." The scheme has ridden the rise of the Irish market and has been rewarded with top decile returns.
The trustees review their investment policy each month, says Browne. "On the equity side, there could be more diversification away from Irish stocks into other countries, which may mean changes on investment management." The small proportion of fixed interest investments which are run in-house are seen as a cash substitute, the 16% in property and a proportion in forestry, are unlikely to be affected by EMU.
There is no doubt what the preferred Euro outcome would be for the Irish Airlines Pension Schemes. Manager Bob O'Reilly says: "If the UK went in at the same time as Ireland, it would be very helpful." The scheme covers members both in Ireland and the UK and is dually approved under both countries' legislation. Because of the 1990 Irish pensions legislation, which was used as a model when Britain was designing its 1995 act, O'Reilly is hoping for exemptions from some of the new UK regulations, such as the minimum funding requirement and the statement of investment principles.
Aer Lingus would like to maintain a unified scheme for economy of scale reasons, but as conditions increasingly diverge between the two countries, ultimately the UK one may have to be hived off, he says.
Assuming Ireland joins, he reckons the administrative and accounting aspects can be coped with through a new software system being installed. "That is a major part of the package's specification." On the investment side, he points out that around 40% of fund assets are Irish. "The Irish equity market is small and has been in heavy demand. With EMU we will have a wider spread of investments, which could be beneficial. It may mean less money going into Irish equities." Having UK liabilities in a different currency will not pose problems in itself. "We have that at present anyway."
The EMU question is probably simpler for banking group AIB since it split its UK and Irish schemes some years ago. Group pensions executive Colum McDonald says switching to the Euro for the administration side should pose few problems. The main impact will be on the investment side since the Irish scheme has a high level of domestic assets. "A proportion could be switched out, but this would be a gradual process," says McDonald. "We do not see a huge effect from EMU on the Irish stock market generally. In fact, it might make it easier for other European investors to move in." He sees monetary union as part of the trend to globalisation and convergence of investment markets. "EMU will just accelerate the process."
But this blurring of the distinction between domestic and European will affect Irish mandates and money managers.
At Dublin fund manager Mongomery Govett, managing director Paul Montgomery sees balanced mandates still dominant in Irish pension portfolios, with little trend to specialist managers. "But in the next five years or so, we will see the overseas equity component increasing even further from its current levels of 44% to 50% and over."
So Irish money managers will need to follow the trend and have wider expertise than just domestic assets. Michael Phelan, investment manager at ESB Fund Managers, is acutely aware of this challenge. Set up some years ago by state-owned electricity company ESB as an independent money manager, it now has some Ir£650m under management. A large chunk of this is for the ESB pension fund, which is run on an arm's-length third-party basis. It has been one of the top performing managers on both a segregated and pooled fund basis, thanks largely to its expertise in the Irish market. "With no currency risk, we assume schemes' actuaries and advisers will be advising them to put more money into Europe," says Phelan. "We are now going to become specialist in European equities and we have plans in hand to meet this challenge."
This transition will be made easier by the current "Europeanisation" of Irish markets. This has occurred most clearly on the fixed interest side. "EMU has driven Irish bond markets for the last year or so," says Phelan. "Already, Irish equities are being viewed in a European context," says Montgomery at Montgomery Govett. "Some of the large-cap stocks are included in the Eurotrack 200. The percentage of overseas holdings of Irish equities has increased dramatically in recent years, which is increasing the pressures on Irish companies to reach European standards."
In addition to the greater investment opportunities, there could be other benefits for Irish pension fund managers, Kevin Finucane of Irish advisers Coyle Hamilton told the recent annual conference of the Irish Association of Pension Funds, which discussed EMU issues. "It may be more attractive, if rates are competitive, for trustees to purchase foreign annuities from insurers in other EMU countries, because the pension will be paid in Euros rather than in the currency where the insurer is established." But if the EMU meant a long-term low interest rate environment, the cost of buying a pension through an annuity would be high, he pointed out. "This will to some extent be compensated by the fact that the inflation-proofing of pensions will be cheaper to secure, but funding for fixed costs pensions will go up." Another area where schemes might need to make changes was to formally change the rules if limits were expressed in pounds. "If there are insured benefits, new insurance policies will probably be needed." He said that investment management agreements might have to be revised where currency matching guidelines are set out or benchmarks and performance-related objectives specified. "A documentation audit should be carried out to determine what changes are required."
Though Ireland will not know whether it is definitely participating until next year, Finucane warned it would be dangerous for schemes not to take action in the meantime. IPE"