FIONA REDDAN

European pension plans continue to shift out of equities, despite rising equity markets across the globe during 2012 and 2013. However, Irish pension schemes are not following the trend, with allocation to equities steady at 44 per cent over the past 12 months, according to a new asset allocation survey from pensions consultant Mercer.

For Paul Kenny, senior investment consultant with Mercer, a combination of factors, such as a challenging and uncertain regulatory background and the challenge of generating positive returns, has meant that some Irish pension schemes have paused their “risk reducing journeys” over 2012. However, he warned that the risks of static high equity allocations for defined benefit pension schemes are “well understood” and long-term de-risking and diversification out of equities remain important objectives.

“Instead of a one size fits all approach, experience on the ground suggests that a significant number of schemes are taking a more dynamic approach to de-risking with any movement away from equities based on the principle of affordability from a solvency perspective,” he said.

Irish pension funds also lag the move towards alternative assets, with Irish funds allocating just 10 per cent to property, cash and alternatives, compared with an allocation of 20 per cent for schemes across Europe.

Looking ahead, the trend away from equities looks set to continue, with around 30 per cent of European schemes suggesting that they expect to reduce their domestic allocation and almost a quarter of schemes expecting to reduce their non-domestic equity exposure. Conversely, schemes look set to increase allocations to bond based strategies in order to manage funding level volatility.

“Pension schemes across Europe remain on a path towards a lower-risk investment strategy, and the general trend in Ireland is no different. However, the approach to reducing risk will not simply mean increases to standard government bond portfolios. Sophisticated risk managed bond strategies are proving essential for providing a greater degree of flexibility and responsiveness to challenging market conditions,” Mr Kenny said, adding that a broader approach to fixed income investing is also on the horizon.