The overall return of the Construction Federation Operatives Pension Scheme, a multi-employer fund, in 2005 was 19%. “It’s a good performance in an Irish context,” says chief executive and pension fund administrator Patrick Ferguson.
The main drivers were equities, but the scheme had also been making allocation changes. We had diversified a fair bit and we are continuing to do that, to go into more specialist mandates rather than global mandates,” says Ferguson.
“At the end of 2005 we had 25% in fixed interest, 62% in equities and the remainder included 2.8-3% in cash and about 9% in real estate. Our fixed income breakdown was around 21% in euro sovereign and 4% in euro corporate. And our equities were very much global: UK equities were around 8% of the fund, euroland 12%, Europe ex-euroland 3%, North America 14% and Japan and the Pacific Basin around 4-5% each. And Irish equities were 16%.”
But the Electricity Supply Board (ESB) pension fund followed a different strategy. “We have very little in Irish equities,” says analyst Emmett Dunleavy. “In fact we don’t have any specific allocation to Irish equities. The Irish equity market is made up of a handful of large companies and we don’t want to have stock-specific exposure, which is generally high if you attempt to match the Irish equity benchmark. So we look to Eurozone and global equity mandates and typically no equity in our portfolio would be more than about 1% of the total value of the fund Equities were up 28%. We had exposure to some emerging markets and Japan, which was up 40%, so that was positive for us.”
The ESB had a return of more than 20%, says Dunleavy. “We have had double-digit returns over the past three years. Real estate was another significant positive for us. Irish property return was up over 24% on the year. At the end of 2005 our strategic asset allocation was about 75% in equities, 10% in bonds and 15% in property, but at the end of the year we were a little underweight in property against our strategic benchmark. This reflected our view that property, particularly at current yields in Ireland, may not achieve our expected long-term returns. In addition, we have some hedging in place. We have a policy of hedging 50% of our non-Euro zone exposure and that had a slight negative return because the dollar improved.”
The market setback in the second quarter had an impact on the Construction Federation Operatives Pension Scheme’s results. “We are running at about a 1% performance for the year so far,” says Ferguson. “But higher interest rates and the impact of Middle East problems on the markets will not cause us to make any dramatic changes to our asset allocation. Rather than make a dramatic move out of equities we will be looking to our fund managers to pick the right stocks. But we have made some moves. We have reduced the cash holding we had at the end of last year, put €10m into commodities with Barclays and are building up a €20m European property growth fund with Standard Life on top of what we already had there. We are also looking at high-yield equities. Overall we are inclined to leave our equity holding where it is because at the end of the day equities are what is going to produce the results when there are results being produced, and to look at other ways of reducing the portfolio’s overall risk to compensate for some of the equity-relate.”
So derivatives? “The trustees have had a request from one manager for the use of futures but are examining the possibility,” says Ferguson. “We have a very conservative board of trustees and that is why we haven’t really looked at hedge funds either. They don’t like what they don’t understand.”
ESB is also reviewing its options. “Like a lot of funds we are in a deficit situation,” says Dunleavy. “We need the assets to work hard for us so we are looking very closely at our asset profile in terms of trying to get assets that are likely to return, typically assets that are not correlated to our traditional drivers like equity. We spent a large part of last year looking at the most efficient set of assets and earlier on this year we made some allocations to things like global tactical asset allocation as an asset class.
“From an asset point of view we are always looking to see that we have the correct manager and mandate structure. We are assessing whether it’s the right time to have a mid-cap equities allocation or whether we should be looking at growth equities now rather than value equities. And on the liability side the company and employees in 2006 agreed to put more money into the pension fund, and that has helped with the funding requirements going forward.”
More generally, pension reform is back on the Irish agenda. The discovery in the 1990s that half of the workforce had no form of private pensions saving led to the introduction in 2003 of personal retirement savings accounts (PRSAs), intended to provide a low-cost, flexible, user-friendly pension product.
“PRSAs haven’t really taken off,” says Ferguson. “The employer has to offer something but the employee doesn’t have to take it up, and even if they do there is no compulsion on the employer to pay into it.”
As a result the initiative has had little impact on pensions coverage. “Almost 50% of the workforce are still without retirement provision other than the state social welfare pension,” says Mary Hutch, head of information and training at the Irish regulator, the Pensions Board.
Currently, the state pension amounts to 3% of GNP but official projections show it rising to 4.9% in 2026 and 10.1% by 2056. And while in 2006 there are 4.3 people at work per person aged over 65 in 2056 the ratio will be 1.4:1.
Earlier this year the Pensions Board sent the findings of a national pensions review to social and family affairs minister Séamus Brennan. “It indicated that the pension targets that we had set ourselves under the previous review would not be met without some changes to the present system,” says Hutch.
Brennan subsequently asked the Pensions Board to produce a technical report on the practicalities of introducing mandatory pensions. “It is not to be a report stating whether Ireland should or should not go down that route,” says Hutch. “Rather it should examine the different mandatory models together with costings.”
“There is a lot opposition to mandatory pension schemes, particularly among employer groups,” says Ferguson. “The problem is that any compulsory scheme the government proposes can look like another tax. We are surprised that they are not looking at industry-wide schemes like us. Let industry put schemes together and run schemes for the various industries like they do on the Continent. That would be a step in the right direction.”