Low-returning bonds still dominant asset class in Irish pensions

Bonds remain the dominant asset class for Irish pension schemes, despite their ultra-low yields, accounting for 48 per cent of the average allocation, according to benefits consultants Mercer.

The firm’s latest European Asset Allocation Survey also reveals that the average allocation to equities has risen modestly in Irish pension funds from 36 per cent to 40 per cent, reflecting the strong performance of equity markets this year. Ireland’s pension funds have the fourth highest exposure to equity markets of the 13 European countries studied.

Ireland’s increasing asset allocation runs counter to a general European trend to cut back on stock market investments consistently over the past 15 years. The average across Europe in the survey was 30 per cent.

Property assets continue to be out of favour, accounting for just 2 per cent of Irish fund allocation assets despite strong recent performance by the sector as it bounces back form the financial crash.

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The survey of more than 1,200 European institutional investors, reflecting assets worth €1.1 trillion, also suggests that Irish schemes have been slower to move into alternative assets than their European counterparts with a 10 per cent allocation compared with the European average of 13 per cent.

‘Difficult position’

"Irish pension scheme trustees are in a difficult position with holding bond assets," Mercer partner Paul Kenny said. " On one hand, very low yields mean future returns on bonds are likely to be low, even negative.

"On the other hand, the Pensions Authority is clear that bonds, which are deemed low-risk assets for defined-benefit pension schemes, remain the most appropriate asset for these schemes, even given ultra-low yields," Mr Kenny said.

Irish pensions funds invest overwhelmingly in Irish government bonds (87 per cent of bond allocation), way ahead of any other country and of the study average of 53 per cent. Pension funds here are also far more averse to investing in generally higher-yielding corporate bonds (6 per cent versus 34 per cent across the study).

“The challenge for trustees is getting the balance right: allocating enough bonds to manage risk and adhere to regulatory pressures without jeopardising the long-term viability of the pension scheme,” he added.

Mr Kenny linked the greater allocation to equities to share rallies in the wake of Trump and Macron election victories in the US and France.

“However, pension scheme trustees should keep in mind that equity market corrections can be unexpected and severe,” he said.

Separately, Mercer’s report highlighted a gradual increase in the number of European pension schemes factoring environmental, social and corporate governance issues into their investment processes.

Financial materiality or sustainability was the main driver behind this trend, cited by 28 per cent of respondents; this was followed by reputational risk, cited by 20 per cent.