The value of Irish pension funds has grown rapidly in recent years, reaching almost IR£26bn by end 1997.
For most trustees and managers, the benchmark is the peer group comparison, but there has been a trend for larger, more mature funds to undertake some form of asset liability modelling to set a more specific benchmark. Historically, the specific benchmarks have been in a similar form to the average allocation, with a high weighting to Irish assets, although they generally had more overseas assets.
It is widely accepted that the high exposure to the domestic equity and bond markets will be reduced following Ireland’s entry to the Eurozone. Many managers have been building up their Euro-zone equity exposure over the last year. However, there is no consensus on the extent or timing of the likely reduction in Irish equity weightings, particularly as the Irish market has performed very strongly in recent years and is still considered good value, given the continuing strength of the domestic economy.
Few commentators believe that the Irish equity weighting will shrink to 2%, the euro-index weighting, but they expect a cut back to, say 20%, in the short to medium term. This is likely to be mainly achieved by reducing the holdings in the large cap stocks where the current weightings might represent significant stock - risk which can now be reduced without taking on currency risk. Many of the smaller cap holdings are likely to be maintained. This is partly due to the skills and biases of the investment managers and trustees, however, there are also benefits from a liability perspective through the link with the Irish economy.
Whilst Euroland will certainly gain, it is not necessarily the case that the whole reduction in Irish holdings will be invested in Euroland. Irish managers have considerable experience of managing currency risk and would move into other non-euro markets if these were considered more attractive.
The start of the euro is likely to act as a catalyst for an overall review of investment strategy by pension fund trustees and their consultants. At the very least, benchmarks will need to be reviewed to reflect the change in emphasis from Ireland to Euroland. It may also be an opportunity to consider whether the existing manager has all the required skills and whether they are likely to outperform in this new environment.
Philip Shier is with Delany, Bacon & Woodrow