Irish pension funds rose by 2.7 per cent in the third quarter of 2003 in a further sign that they are recovering some of the substantial losses suffered during 2002. Laura Slattery reports.

The total value of pension funds fell by 12.4 per cent during 2002, a survey by the Irish Association of Pension Funds (IAPF) has shown.

The value of assets in the pension funds stood at €44.8 billion at the end of 2002, compared to €51.1 billion at the end of 2001.

However, the latest figures from consultancy firms Mercer and Coyle Hamilton show that, after a bad start, group pension managed funds have rallied this year, with the gain in the third quarter following growth of 9 per cent in the second.

Mercer's survey records an average year-to-date growth at 6.3 per cent, while Coyle Hamilton places it at 6.4 per cent.

But the recovery was undermined by a rocky performance in September, during which pension funds lost an average of 2.5 per cent of their value, according to Mercer.

Ms Gráinne Alexander, senior investment consultant at Mercer, said equities had come off sharply as a result of some negative news, including a fall in US consumer confidence figures and a surprise OPEC oil production cut.

"After strong gains in the market since the end of March, it was not too surprising that a pause in the upward momentum of stocks took place on some less positive news," she said.

Despite this setback, equity markets posted positive returns across the board, Ms Alexander added.

"The good relative performance of equities is further emphasised by the flat performance from bonds over this period, with some fixed income markets recording marginal losses."

Mr Joe Byrne, group actuary for Coyle Hamilton and vice-chairman of the IAPF, said pension fund managers who felt equities were undervalued would invest more heavily in equities than bonds in the short-term.

The IAPF's asset allocation survey shows that the proportion of assets held in equities fell significantly to 58 per cent from 65 per cent at the end of 2002.

Meanwhile, the weighting pension fund managers gave to fixed interest and index-linked stock grew substantially from 21.7 per cent at the end of 2001 to 27 per cent at the end of 2002.

This was mainly as a result of fixed income assets outperforming equities. Despite the short-term outlook for bonds, Mr Byrne expects the proportion of fixed interest assets will eventually increase to 35 per cent or more as fund managers become more conservative to satisfy minimum funding standards and new accounting rules.

He also believes schemes in deficit may find it more difficult to recover if they invest heavily in bonds, however these funds are "not in a position to gamble".

Irish pension funds' exposure to Irish equities continued to fall during 2002 to 13.2 per cent at the year end, compared to 16 per cent at the end of 2001.

Mr Byrne expects this would fall further as pension fund managers seek to avoid high stock-specific risks.

The recent strong equity gains mean that medium-term managed pension fund returns have moved back into positive territory, Mercer notes, despite the turmoil suffered over the past three bear market years.

The average managed fund has returned 2.5 per cent over the last five years, with Montgomery Oppenheim and New Ireland performing better than anyone else.

AIB Investment Managers was the worst performer over this period.

"Over the 10-year period, the average return is 8.6 per cent per annum, which comfortably exceeds the corresponding inflation rate of 3.1 per cent per annum," said Ms Alexander.

Over the most recent quarter, Acorn Life and Irish Life Global Access were the best performing managers, according to the Mercer survey, returning 3.7 per cent and 3.1 per cent respectively.

Setanta Asset Management, which manages funds on behalf of Canada Life, was the worst performer with a return of 1.7 per cent, 1 percentage point below the average.