Irish pension funds will reduce their allocations in real estate in favour of alpha strategies focusing on hedge funds and active currency management, according to Mercer Investment Consulting.
However, the consultant says schemes will first have to wean themselves off large-cap equities.
A survey of 570 European pension funds with €364bn assets under management found that almost all Irish pension funds had exposure to real estate, compared with 68% in Switzerland and 41% in the Netherlands.
"Domestic real estate really has been the alternative asset class for Irish pension funds," said Tom Geraghty, head of Mercer Investment Consulting in Ireland.
Irish pension funds have significantly higher exposure to equities than pension funds elsewhere in Europe - 60% compared with a European average of 33%. Traditionally, pension funds have made significant allocations to Irish equities of between 15-20%, with 5-10% in primarily domestic real estate.
Now, Geraghty said, large pension funds were looking to diversify into other alternative assets. "In fact, pension funds are looking to diversify out of real estate because its had such a phenomenal run," he said, "but they're not sold on the alternatives.
"Smaller pension funds are happy to continue with the balanced approach," he added. "The bigger ones are looking to diversify into alternatives but they haven't yet taken them on."
He predicted that, starting with the large pension funds, over the next five years the focus on hedge funds and active currency management would trickle down to smaller funds. "But it will happen very, very slowly," he said.