Irish pension funds are facing a most difficult reality. About €7bn or 8% of Irish pension assets are invested domestically, according to the Irish Association of Pension Funds (IAPF). While that figure may not seem particularly high, the Dublin Stock Exchange has had a particularly poor streak, down 32% for the twelve months into March. The domestic equity market shed 9.5% just in the first three months of the year, according to Bloomberg LP, weighed down by the exchange’s heavy concentration in banks.

Best practice in Europe’s pension industry suggests that institutional investors should risk no more than 1% of their equity allocation to the relatively small Irish stock market because five banking stocks on the Dublin exchange account for half of the Irish market value. Yet a number of Irish fund managers have much higher allocations than the 8% average and their year-to-date performance reflects their high concentration to the domestic market.

Indeed, the value of Irish pension assets has slumped by €10bn in the first three months of the year, according to figures from Rubicon. The report covers pension fund asset managers, which have higher exposure to the domestic market, than large corporate pension plans. “The smaller pensions are more likely to invest with local asset managers,” says Jerry Moriarty, Director of Policy at IAPF. “They have historically had a higher allocation to Irish stocks because of exchange rate concerns. Since the adoption of the euro, trustees have moved to reduce their domestic equity concentration, but there is still historical hangover that pre-dates the introduction of the euro.”

One market, one industry

A number of pension asset managers have particularly high levels of exposure to domestic banks. Bank of Ireland has 17.9% invested in domestic equities. KBC Asset Management has 17.6% invested. Other pension providers such as Irish Life and AIB Investment managers have 14.9% and 14.3% of their equity funds invested in Irish shares. This has contributed to significant losses among the group even as the overall pension plan allocation to equities dropped from 13% in 2002, according to IAPF.

At the same time, the drop in ISEQ (Ireland’s stock market) was 24.5% in 2007 compared to a gain of 8.7% for the FTSE Eurobloc, .4% for FTSE World, a loss of 3.1% for the FTSE North America and 14% for FTSE Japan. This underperformance has had a particularly negative impact on domestic pension fund managers.

The ten-year performance of Irish managed pension assets has been 3.2% per year compared to an inflation rate of 3.8% during the same period. “Having declined 7.9% over the first two months of the year, Irish pension funds continued to struggle during March, with the average managed fund declining a further 3.8% during the month,” says Fiona Daly, Managing Director at Rubicon. “Irish pension fund managers have now lost 14.8% of their value over the past twelve months.”

It must be said that the country’s National Pension Reserve Fund (NPRF) has a significant lower weighting to the domestic market than the group of pension managers surveyed by Rubicon. The NPRF has 50% of its large cap equity investments to the Euro zone, says Adrian O’Donovan, NPRF Commission Secretary. “Only 1% of the total fund is invested in Irish equities.” The picture is starker among the pension managers. Eagle Star and Friends First posted a loss of 11.2% and 13.9%, respectively, in the last three months.

Only one manager, Oppenheimer, has outpaced inflation in the last decade (It posted a loss of 10.1% in the first quarter of the year.) 

The figures come at a particularly sensitive time as the government examines the prospect of mandatory pensions for employees. The results also point to a marked divergence in performance of Irish managed funds last year with a swing of 9.5% between the top and bottom performers and the risks inherent in portfolios concentrated in a single geographic market and asset class.

VB