Biggest drop in pension funds in five years

CLOSE to €7 billion has been wiped off Irish managed pension funds so far this month — signalling a black November for investors.

This is the biggest drop in managed pension funds in almost five years.

Mercer Investment Consulting said yesterday that in the year to date the average pension fund is down 5%, which equates to about €5 billion.

This compares to an increase of 4% at themiddle of the year, which represents a swing factor of €9 billion in terms of the overall Irish pension assets.

The funds have suffered in particular from investments in local banks such as AIB, whose shares have declined 24% this month on concern that the country’s property boom is cooling.

Yesterday, Mercer said pension funds have also been hit by the falls in global stock markets because of investors fear over economic slowdown and the potential global impact of the US subprime mortgage crisis.

The Irish stock market has been particularly badly affected, being a relatively small market concentrated in financial and housing-related stocks and losing 15% of its value this month alone, while down 28% in the year to date.

Senior consultant with Mercer, Noel Collins, said: “In our view, these recent events highlight two key factors. Firstly, it is important to have as diversified a portfolio as possible.Equities do give good long-term returns, but they can be very volatile, as we are seeing. Other asset classes can offer protection in such an environment, such as bonds and cash.

“Additionally, non-traditional asset classes, for example commodities and infrastructure, can give returns which are not so affected by falling equity markets.

“The weak US dollar alone would have knocked about 2% off the value of a pension fund this year, which is why we advise our clients to have strategic currency hedging policies in place.”

Chairman of the Irish Association of Pension Funds, Patrick Burke, said there has been a significant fall across the world, but he urged people to think long-term, and said markets will always fall and rise, and for this reason people can afford to take risks when it comes to pensions.

Last year Irish pension funds grew 12.6% to €87.7bn according to the annual asset allocation survey published today by the association.

By the end of this year Mercer said it expects pension funds to recover at a modest rate from the 7% drop recorded yesterday.