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Tuesday, 16th April 2024
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Trustees look at specialist pension management Back  
Pension fund trustees are re-examining their investments and considering new approaches. Brid Horan looks at the evolving trends within the industry.
It has become a clich? to refer to the accelerating pace of change in one aspect of life or another. In looking back on the past year for pension funds, it is difficult to avoid that very clich?. The year brought changes on a number of fronts and the outlook for the future is for change to continue and intensify.

The most radical and far-reaching development was the establishment of the National Pensions Reserve Fund. This is to meet part of the cost of Social Welfare and Public Service pensions from 2025 on, thus making advance provision for the time when the ratio of retirees to workers will increase dramatically. Because of its remit, this Fund will contribute to the ultimate income of most pensioners. While the legislation on the management of the Fund is still to be finalised at the time of writing, the NPRF Commission is to operate as an independent body with authority to determine and implement investment strategy based on commercial principles. This approach is in line with that of occupational pension schemes in Ireland, an approach which has served well through strong investment returns. The Commission will face a number of critical issues in framing its investment strategy and the debate now starting will bring a number of key issues to the fore. This debate may influence the consideration of investment strategy already taking place within existing company pension funds.

With the introduction of the Euro, the local currency market for investment extended to Euroland countries, prompting pension fund trustees to re-examine their investment approach. As well as questioning the appropriate geographical exposure, some are considering whether to move to specialist management which requires managers to focus on particular asset classes or regions, such as global equities or Euroland bonds for example. This type of management was previously considered appropriate only for the largest funds but the influence of multi-national companies, familiar with specialist management in the US and elsewhere, and the growing interest of overseas investment managers in the Irish market are increasing interest in this issue. The offering of passive investment approaches by many Irish investment managers has also fuelled the debate.

Regardless of investment approach, fund returns continue to be the key concern for trustees. Following average returns of some 20 per cent in 1999, 2000 brought a less comfortable ride. Up by some 4 to 5 per cent in quarter one, down by the same amount in the second quarter and up again in quarter three, the eventual outcome for the year is as yet unknown at time of writing. The nature of international stock markets, with enormous swings in daily values, highlights the need to focus on the appropriate long-term strategy and to be comfortable with the ability of the manager or managers to deliver the appropriate returns within that strategy and with acceptable risk levels.

The Irish stock market has had a relatively good year so far, having been muted in 1999. Irish pension funds are now less reliant on Irish stocks with their holdings down to 20 per cent at the start of the year and still further reduced by now, from some 26 per cent in 1998. The reduction in 1999 reflected both the market’s relative under-performance and decisions to re-balance funds’ exposure away from the local market to the broader Euroland, offering the opportunity to diversify investments without adding currency risk.

On the domestic scene, the Approved Retirement Funds introduced in 1999 for the self-employed and proprietary company directors were extended in the Finance Act 2000. These funds, known as ARFs, offer the alternative of continuing to invest your pension funding and drawing out cash as you need it rather than buying an annuity or pension at retirement. As well as a change in the tax treatment of ARFs in the 2000 Act which brought them more into line with other pension products, the option was extended to funds from Additional Voluntary Contribution (AVC) Schemes, thus making them available to many pension scheme members for the first time. The new regime brings new choices and, for some people new dilemmas or risks. Appropriate consumer protection measures including comprehensive and comprehensible information and a statutory ‘cooling off’ period will be needed.

On the European front, the draft EU Pensions Directive, published in October, includes among its objectives protecting pension beneficiaries and enabling funds to take advantage of the single market and the Euro to improve their investment strategies. For Irish funds, the confirmation of the ‘prudent person’ approach to investment is welcome and the proposed tax regime is broadly in line with our current system. The directive is unlikely to be adopted for a number of years so the emergence of pan European pension schemes is still some way away.

The year 2000 has been spent awaiting a number of other major developments on the home front. The Pensions Bill which will implement key changes recommended in the 1998 National Pensions Policy Initiative and other significant changes will not now be published until early 2001. At the time of writing, the report of the Commission on Public Service Pensions is also awaited. Changes in accounting for pension costs in company accounts, by the Accounting Standards Board in FRS17, are the subject of continuing controversy. These changes could have far-reaching implications for pension scheme sponsors and further debate seems certain. Undoubtedly 2001 and beyond will continue the change agenda facing pension fund trustees and sponsors.

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