Irish investment strategy 'too risky'
IRELAND - The investment strategy of many Irish pension funds was "too risky" and is why around 90% of schemes failed to meet the funding standard last year, the Pensions Board has claimed, and why some are unable to meet liabilities of existing pensioners if the scheme were to wind-up.
Brendan Kennedy, chief executive of the organisation, gave evidence to the Oireachtas' committee of public accounts on the Pensions Board's 2008 annual accounts which revealed the typical defined benefit (DB) scheme lost between 30-40% of their value in the period between period late 2007 to March 2009. (See earlier IPE article: Third of Irish DB failed funding test in 2008)
In answer to a question from deputy Pádraic McCormack on whether these losses resulted from "bad or risky" investments by the schemes, Kennedy stated: "It is our view that the investment strategy of too many pension schemes was too risky".
He argued that in comparison with UK, Dutch or German pension schemes, "Irish pension schemes tend to have a considerably higher proportion of stocks and shares in property. Obviously, these were the areas that suffered most since late 2007. As a result, many schemes do not have enough to meet the funding standard".
Kennedy admitted to the committee that while it had raised the issue of investment strategy "several times in recent years", the responsibility for making investment decisions lies with pension trustees, and the Board "does not have the power" to guide particular schemes or suggest they should invest in a certain way.
"We cannot say to a particular scheme that although it has 80% of its funds invested in stocks and shares, we believe the proportion should be 50%. Our job is to encourage trustees and their advisers to consider the issue of investment risk. The correct and appropriate investment varies from scheme to scheme and there is no one answer," said Kennedy.
The Pensions Board also told committee members that it cannot impose investment limits on pension funds under the 2003 EU Directive, so its role is to raise awareness and enforce investment regulations that apply to trustees.
However, Kennedy said the applicable regulations under trust law "deal only in principles" so it is very difficult to prove a specific offence, which means changing investment behaviour will be "considerably more effective through raising awareness because we do not feel that specific prosecutions in this area would succeed".
In the evidence session, the Pensions Board also noted the contribution rates from both employers and employees had not been consistent with the level of benefits promised, as there had been a focus on minimising contributions that had helped produce the current funding problem.
Kennedy pointed out that, particularly in difficult times, there is a natural tendency to calculate the minimum contribution to get schemes through the next funding standard or to restore the funding standard process.
But he warned the funding standard is a benchmark for defining the benefits provided, and not the costs of the scheme, so the Board is concerned that "schemes may not have done a fundamental reassessment, particularly in light of increased life expectancy, of what they can expect their scheme to cost in the long term and, in some cases, whether they are prepared or able to pay that amount of money".
He pointed out for a scheme offering a pension of two-thirds of final salary, ignoring investment losses, the long-term cost is around 20-25% of payroll: a large figure which some trustees or employers may not be aware of and may not be able to afford.
And Kennedy admitted: "Unfortunately, there may be cases, and I hope there are very few, where even existing benefits cannot be afforded and will have to be cut back. That is happening now. We emphasise to trustees that their scheme has suffered investment losses in the past 18 months. There has been an element of 'wait and see' about it to find where things settle but now all trustees must engage with their pension scheme and providers, assess their current position and plan in conjunction with the employer."
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