Pension funds ‘over-exposed to equities’, conference hears

PENSION funds are over-exposed to equities and risk serious losses if the markets under perform, fund trustees were told yesterday.

Trustees were also told to be more proactive if they want the best returns for their funds, by Tom Geraghty, head of Mercer Investment Consulting.

Speaking at the group’s investment conference, Mr Geraghty said Irish fund managers do not measure up to the best international performances.

While pension assets grew 22% last year, declining bond yields put upward pressure on the value of pension liabilities, he said.

Long-dated bond yields continued to decline last year and liabilities rose 13% as a consequence of that which meant the 22% asset growth was undermined in most cases, he said.

Brian Griffin, senior consultant and partner at Mercer, challenged the high equity allocation of funds.

“At approximately 80%, current equity allocations would beg a neutral observer to ask the question whether or not balanced funds are actually balanced?”

In Britain the equity exposure of funds is 55%-60% and it is 50% in the US.

Pension funds “are potentially exposing themselves to the same levels of risk that saw funding levels drop dramatically in the recent past”, he said.

Irish funds have a 22%-plus holding in Irish shares representing a concentrated exposure to the relatively small Irish market, which carries obvious risks.

Irish banks account for 40% of the market and the risks are obvious if anything should happen to the banking sector, he said.

Funds in the past had a 5% exposure to Elan when it dived and lessons have not been learned in the meantime, with Irish funds still tending to have a 40% exposure to the Irish market, he said.

Instead of opting for the predominantly large cap equity bet, trustees should look at global small cap and emerging market equities.

Investment in overseas properties, hedge funds and private equity were other options, he said.

Michael Dempsey, senior consultant at Mercer, said trustees are paying active fund managers substantial fees and they need to be satisfied they are getting value for money.