Irish pension funds face growing uncertainty in the current regulatory climate, with the promised revision to the minimum funding standard overdue and the introduction of sovereign annuities leaving trustees to wonder just how liable they will be for any losses incurred when using the new product.
Speakers at the Irish Association of Pension Funds (IAPF) investment conference in Dublin last month touched on both subjects, with Mercer’s senior investment consultant Paul Kenny admitting he was unsure where emerging market government debt would fall within the new framework. He said that, while it was in practice a growth asset, only a debate on the spirit or the letter of the law would clarify the Pensions Board’s position.
Meanwhile, Peggy Hughes, head of the pensions team at law firm Mason Hayes & Curran, sought to allay concerns about sovereign annuities, which would potentially transfer the risk of default onto members. She explained that, as long as trustees acted “honestly and reasonably” within the Pensions Act, they were likely to be protected from any liability - although she conceded she could not say for sure, as the legislation had yet to be tested in court.
George Cooper, fund manager at BlueCrest Capital Management, returned to the problem of funding, referring to European Commission plans for changes to the IORP directive. “They will be implementing regulation to encourage pension funds to move their assets more and more into long-term nominal bonds,” the former Goldman Sachs fund manager told attendees, adding that the so-called ‘holistic balance sheet’ proposal would see capital buffers applied to anything but supposedly risk-free government debt.
He warned that, once inflation began to creep up - although still “quite a way away” - the real value of all debt would be eroded, leaving pension funds with increased real-term shortfalls from investment returns. He also criticised the “dogged belief” that it would reduce risk to increase exposure to bonds and said the new fiscal stability pact proposed by the European Union - which Irish voters have the opportunity to ratify or reject later this year - was a “European suicide pact” and “most ridiculous”.
“The real challenge for pension funds is to work out when they will be able to shift from this debt inflation phase into the monetisation/stagflation phase,” he said, explaining that the shift in focus would go hand-in-hand with investment strategies adjusting away from bonds and targeting real assets such as real estate once more.
Gráinne Alexander, managing director at F&C Ireland, meanwhile argued that, despite the unpredictable equity returns of the past decade, the last two years had seen stronger growth in the sector. She acknowledged that there would be a move away from the “large equity cult”, but she said she was sure the stock market would remain predominant in investment strategies.