Irish pooled funds' progress
The Irish pension market, though among the smallest in Europe, is currently very active. It is being driven by a number of themes – not least fears about the low volume of contributions to pensions. These fears are supported by government initiatives – notably the recently introduced personal retirement savings accounts (PRSAs), the Irish equivalent of the UK’s stakeholder pensions.
Though the overall pensions numbers in Ireland are relatively small, by some measures it is surprisingly well provided for. With its 3.8m population it has E50.6bn in pension assets, comparing favourably to Spain, which has E48.1bn but a population of 41.3m. In terms of pension assets as a percentage of GDP, Ireland is ahead of a number of countries, including France, Germany, Belgium, Italy, Norway and Spain. Ireland’s dependency ratio is also lower than that of any other country among the 15 covered in the recent Mercer European Pension Fund Managers’ Guide.
Whether or not government propaganda is having an effect, Ireland is a growing market for pooled pension fund providers. Non-segregated pension money managed by Irish Association of Investment Managers members grew by an average of 15% during 2003, compared to 9% for assets managed in segregated vehicles.
Overseas countries are making inroads in the market. After the four big domestic players, Bank of Ireland, Irish Life, AIB and KBC Asset Management, the rest of the top ten providers of pension fund management are US and UK companies.
“There is a trend for money to go to overseas managers, particularly at the DB end. It’s a reality,” says Setanta Asset Management director Paul McCarville. “The move towards specialist management has coincided with a lot more involvement by international managers. The perception that because they are better re-sourced, large managers deliver better performance is not borne out by historical performance.”
Comments from Tom Geraghty, senior investment consultant with Mercer in Dublin, confirm this view. “The move to foreign providers is a noticeable and continuing trend”, he says. Whereas at the beginning of 2003 around 17% of pensions funds had their entire assets with foreign managers, Geraghty’s guesstimate is that this has moved to perhaps 20% at the beginning of 2004. On “rough numbers” for 2003, he reckons that half of all selection procedures on behalf of clients resulted in a mandate being awarded to international managers.
The traffic has not been all one-way. Irish domestic fund managers are looking to expand overseas as well as serving their own market. The recently launched common contractual fund is an Irish version of the fonds commun de placement (FCP). These funds are designed to attract to Dublin multinationals seeking a multi-country asset pooling vehicle for an employee base spanning several states.
Funds designed for the domestic pensions market are mainly unitised funds with gross rollup for tax purposes. The quarterly Mercer Market Insight report divides them into the following main categories: actively managed funds with an emphasis on Irish equities (typically just under 17% of assets); consensus funds, which are passively managed with variable asset allocation based on the average of active fund weightings; and Euromanaged, with a much smaller percentage of assets in Irish equities, and higher weightings in Europe ex-Ireland. Within the actively managed category there are a number of multi-manager funds.
Users of pooled pension vehicles are the small to medium pension funds, says Geraghty. “They are the pervasive vehicle among funds of E10-15m in size. Beyond that, a segregated structure is more likely,” he says. Smaller funds will typically use one, or at most two managed funds “as their total pie,” he adds.
But the picture is not entirely simple. Recent market conditions are now causing pension trustees to look again at their investment approach. In Geraghty’s view they are now looking at their funds: “In a more businesslike fashion. They are stepping back from the traditional route and taking a more holistic approach. They are looking in a much more strategic way at the fund’s assets and liabilities, and are acknowledging risk.”
At the larger end of the pension fund market this has meant a noticeable trend towards specialist structures and best of class managers. An example seen as a case study for the whole industry was the E8bn National Pensions Reserve Fund, which switched its assets to a best in class global specialist.
The upshot is that where a big pension fund might have been in a pooled, balanced arrangement, a strategic review of its objectives could mean a switch to allocations based on different asset classes via a specialist fund manager. The move towards specialist structures has also resulted in a growing interest in multi-manager funds, which provide access to “best of breed” managers in a format which allows entry to the smaller pension fund client. The main players in this area include SEI, Irish Life and AIB. Another launch is expected shortly.
Another big shift is the move from DB to DC schemes. “It’s a tidal wave. It’s unstoppable,” says McCarville. His own company, Setanta, concentrates more on the DC than the DB market. As in pension markets anywhere, adds McCarville, “DC is more about brand name and product. There is also the issue of servicing. It’s a market where local providers can dominate”.
Geraghty agrees that “DC is certainly a trend. We are a country which has been successful in attracting multinational employers, and the theme with those companies is DC provision”. Of all local schemes, 25-30% are now DC, says Mr Geraghty, though taking away the public service sector, some 50% of occupational schemes would be on a DC basis.
Consensus funds are an important feature of the Irish pooled fund scene, and despite changing strategies they are still popular. The giant in this market is Irish Life, with E2.6bn in consensus funds out of an indexed funds total of E7.1bn. Consensus funds operate by taking the average asset allocation weightings of the active fund universe, and using market indices to establish a portfolio at stock selection level. They were developed in the 1990s as a product largely for the DC market, and to counteract the “manager merry-go-round” – the cycle of underperformance which can appear as trustees repeatedly switch to a new manager just as it has passed a cyclical peak in performance. Ollie Fahey, head of pension portfolio management at Irish Life, feels that fear of the merry-go-round effect is a major factor in maintaining the consensus fund’s popularity. “We haven’t seen any evidence of a move away,” he says.
Fahey acknowledges that the increasing maturity profile of many DB schemes will lead to more and more trustees moving away from managed funds into fixed interest based portfolios. But even this may not affect the longevity of the consensus fund. “We can break out the consensus into its constituent parts in order to meet the needs of clients,” he adds.
Shane Wall, consulting actuary at Coyle Hamilton, agrees that consensus funds continue to be popular. “There is a move away from broadly managed funds, but not specifically from consensus, because the move away from active and into passive management still continues, particularly in the DC market, where the consensus fund is often the default option,” he says.
Looking ahead, Wall sees something of a pent up demand for more fixed interest. “Many trustees say they want more in bonds but now is not the time. They are waiting for higher interest rates and taking a bet that equities will outperform bonds in the short term,” he says.
McCarville sees the industry looking even further to meet changing needs: absolute returns and alternatives, though not yet widely understood, are “a trend that won’t go away”. “Where major consultancy firms are all prepared to say there is a place for some 3% to 5% of assets in these products, they are giving it the imprimatur. Trustees will all have to decide whether to play or watch”, he concludes.