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Irish industry's unwillingness to de-risk remains 'significant concern'

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The Irish pension industry’s reluctance to switch to a liability-matching investment approach remains a cause of significant concern, the Pensions Authority has said.

Brendan Kennedy, who was named chief executive of the Pensions Board in 2006 and remains head of the Pensions Authority, also rejected any claims that the current regulatory environment was causing trustees to be overly prudent.

Speaking with IPE ahead of today’s debate at the Irish Association of Pension Funds annual investment conference on whether trustees were at risk of being excessively prudent, he said he understood the industry had concerns but saw no evidence such concerns were warranted.

“We’ve looked at the data available to us, and, firstly, we see no widespread evidence of, as they call it, overprudence or reckless prudence,” he said.

“Secondly, actually, our concerns remain that there are too many schemes that are continuing to carry a great deal of equity risk on their balance sheet, which seems to be out of sync with the liability structure of those schemes,” he said.

The accusation of reckless prudence comes after IAPF chairman Maurice Whyms last year warned that Irish schemes risked being an “extreme case” of such an attitude, given the current low-yield environment.

It also echoes concerns voiced by the outgoing chairman of the UK Pensions Regulator, Michael O’Higgins.

Kennedy made clear he did not see it as the Authority’s role to say how pension funds should invest assets, which he stressed was the responsibility of trustees.

“However, it is absolutely appropriate for us to ask the trustees appropriate questions – and it is clear many trustees don’t seem to agree that matching is appropriate and are very reluctant do so,” he said. “That is a cause of significant concern to us.”

In October last year, he noted that trustees were only de-risking “begrudgingly”.

He said that, while it was impossible to predict with certainty the future direction of bond yields, it was unacceptable to the Authority for anyone to assume it was “certain” that equities would outperform bonds, and to construct recovery plans around such a scenario.

He said this would only be possible if the scheme had “the wherewithal through surpluses or employer undertakings to cope with what might happen if their expectations turned out not to be true” – an unlikely scenario in a market where, upon reinstatement of the funding standard, eight out of 10 DB schemes were underfunded.

“We would emphasise to schemes that, clearly, there are minimum funding obligations to comply with, but trustees should look not just at the minimum funding standard but at their management of the scheme,” Kennedy said.

Adding that risk management was “central” to any asset allocation approach, the head of the regulator said: “[Trustees] are carrying important responsibilities, and, running a defined benefit scheme, it’s quite a financially sophisticated obligation.

“It is more complicated than merely saying ‘do we meet the minimum funding standard?’”

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