| Strong Irish pension fund asset growth still outpaced |
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| Assets held by Irish institutional pension funds outperformed their European peers in 2004, growing by almost 10 per cent, but this was still not sufficient to match the increase in fund liabilities recorded during the year, according to a report from Watson Wyatt. |
‘Although the strong performance in the Irish stock market helped to support pension fund assets during the last year, liabilities have continued to outperform assets, further weakening the Irish corporate pension fund balance sheet,’ Paul Droop, senior investment consultant at Watson Wyatt in Dublin, said.
‘The main reason for this has been that long term interest rates have been falling over the last year. In 2004, that was one of the key features of financial markets and that tends to increase the present value of all future liabilities of these pension funds.’ he added.
Although this situation is seen as a cause for alarm, Droop said that it is not yet a crises. ‘You wouldn’t say it is a crisis, but it is a big issue. As this research shows, even if you get a reasonably good year for asset growth, change in liabilities can outpace growth in your assets and lead to that increased deficit again so you can’t always rely on the growth of assets.’
According to Droop, pension fund administrators are now rethinking their investment models. ‘You have to be careful about what strategy you use and one of the things pension schemes are grappling with at the moment is whether they need a much better matching of their liabilities with their assets,’ he said.
‘In the past there has been a heavy weighting of equities, maybe 70-80 per cent of their assets in some cases were held in shares and stocks, but there is some shift.
There are some people who have been strong proponents of a strong shift to assets away from stocks and shares to, say, bonds that are seen as much better matching for liabilities,’ he added.
This is a view backed up by Roger Urwin, global head of investment consultancy at Watson Wyatt.
‘Going forward, while it is likely that equities will play an important role in pension fund investment, it is unlikely that they will account for such a large portion of total assets again,’ he said. |
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| Article appeared in the February 2005 issue.
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