IAPF warning on pension fund change

OCCUPATIONAL pension fund managers have been warned not to increase their exposure to property investment following changes in this year’s Finance Act.

If Finance Minister Charlie McCreevy was hoping to trigger another property boom by the change he is set to be disappointed.

In its assessment of the change, which allows funds to borrow to invest in property, the Irish Association of Pension Funds (IAPF) has issued a severe health warning. It said under no circumstance should such funds increase their property exposure beyond the traditional 10%. Its advice, if heeded, rules out any serious boost to the already highly-charged Irish property market.

IAPF argues against such a move for several reasons. The biggest argument against is that funds, while open to significant capital gains, could also suffer serious losses and the risks are simply too high for funds with long-term commitments to individuals.

Changes in the Finance Act 2004 allow pension funds to borrow in order to make investments.

But the paper by IAPF warns of the implications of the removal of the ban on direct gearing by occupational pension schemes.

It also warns individuals with personal pension cover to be wary about over-exposing their plans following the changes.

Individuals operating small self-administered schemes (SSASs) are the group most likely to want to avail of the change in the law, said Joseph O’Dea of the IAPF.

“Trustees of occupational pensions schemes will be more reluctant to borrow to finance investment for their pension funds,” he said.

IAPF’s guidance paper also warns small self-administered schemes of the dangers of going too big into property. “Individuals should be very wary of employing high levels of gearing within pension schemes which represent the bulk of their retirement provision,” it says.

Pat Lardner, chairman of the IAPF investment committee, said occupational pension schemes were unlikely to increase their asset allocation in property above the accepted 10% norm. “Leverage allows investors to gain exposure to the upside potential of investments larger than the value of their capital. However, the investor cannot gain exposure to this upside potential without also being exposed to the risk of the larger investment. Trustees will be unlikely to commit occupational schemes to this risk.”

Other issues should also make trustees wary, including the contradiction of borrowing if the fund is already holding fixed interest instruments such as bonds that could be liquidated as an alternative to borrowing.

While pension fund investment is long-term, liquidity may also be a factor in retaining existing asset allocation breakdowns.