Italian uncertainty puts €1bn in Irish pension funds at risk

Irish pension savers are at risk of losing money amid the ongoing Italian political turmoil, with more than €1 billion of Irish pension assets invested in the Italian bond market.

According to Mercer, there could be over € 1 billion of assets in Irish defined benefit pension schemes invested in the Italian bond market. Given that many more pension savers will be invested in personal or defined contribution (DC) schemes, which may also be invested in bond funds which have an exposure to Italy, the true scale of exposure to the Italian market by Irish pension savers is likely to be considerably higher. Indeed Mercer said that being invested in Italian bonds could be an issue for members of DC pension schemes who are near retirement and want to use their retirement savings to purchase an annuity.

"This means political instability in Italy is more than just a spectator sport for Irish investors: we have skin in the game, both in terms of direct investments in Italian bonds and the risks posed by the impact of the crisis on broader European markets," said Paul Kenny, head of investments with Mercer.

Last Friday, Italy's new government led by Giuseppe Conte was sworn in, bringing to an end the country's policital crisis, but the Eurosceptic and fiscally liberal governmenthat he now leads could indicate that further risks lie ahead.

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Ahead of the formation of the new goverment, investors had sold out of Italian government bonds, driving their value lower. For example the value of 10-year Italian government bonds was down by over 10 per cent over the month of May at one stage, before recovering somewhat as some calm was restored on the back of the formation of a government. But it doesn’t mean that the calm is here to stay.

“Despite recent developments in relation to the formation of a government it isn’t obvious that the political issues will be fundamentally resolved any time soon; investors are likely to remain nervous and further bouts of extreme volatility are possible,” Kenny said.

According to Kenny, one positive of the current volatility is the fact that the ECB has put systems in place to help limit contagion.

“Nonetheless it is a timely reminder to investors and particularly pension fund trustees that diversification of investments, and a constant reassessment of risk exposure is needed to minimise losses from political events of this nature,” he said.