Irish defined benefit pension funds have the highest exposure in Europe to low risk bonds, according to a report by benefits consultants Mercer. The company's annual asset allocation survey also shows that Irish pension funds have the smallest exposure to property among European funds.
The study looked at how pension funds in the UK, Germany, France, Italy, Belgium, the Netherlands, Austria, Switzerland, Portugal and Norway invest their money.
Overall, the report shows defined benefit , or final salary, pension scheme continue to reduce their exposure to more volatile investments in stocks and shares.
Ireland reflected this trend, with fund allocation to equities falling to 23 per cent, down four points on 2020, and a third less than the 36 per cent invested in shares as recently as 2016 in the typical Irish defined benefit portfolio.
Exposure to bonds moved even more dramatically the other way, rising from 50 to 58 per cent allocation.
Protect funds
Mercer said investors were looking to protect funds from “volatility and act on concerns related to high valuations in equity markets”.
The report found that, despite the Covid-19 market slide in March, stock markets posted positive returns of 6.1 per cent for developed markets and 8.1 per cent in emerging markets.
Figures published by Rubicon Investment Consulting for 2020 show that few multi-asset managed funds matched those returns last year, with an average gain of 4.3 per cent in a year of sharply divided fortunes for Irish fund managers. Returns ranged from a gain of 21.7 per cent at Merrion's Managed Fund to a loss of 3.1 per cent at the managed funds of New Ireland and Setanta.
Within bond investment, Ireland is more exposed to government bonds than other European states and less invested in higher yielding corporate bonds.
Looking at Irish defined contribution pension schemes, which account for the majority of pension saving in the private sector, the allocation to equities is much higher at 50 per cent, with 13 per cent in bonds and 29 per cent in alternatives. Ireland has a slightly higher equity allocation than the European average of 47 per cent. Defined contribution schemes do not promise a specific pension payment. Instead the pension fund depends on the level of contributions and their investment performance.
ESG focus
Mercer also examined the growing influence of ESG (environment, social and governance) issues for pension funds. Rob Meaney, responsible investment lead for Mercer Ireland, said that, in this area, "trends in Ireland are slightly lagging European norms".
Across 12 European markets when €233 billion was allocated to sustainable funds, 76 per cent said they considered ESG factors when making investment decisions. In Ireland, the figure was 69 per cent.
And Ireland alone among the 12 considered governance the most important element of ESG. In all other markets, the environment was seen as the major ESG issue.
"The two biggest concerns for investors this year were Covid-19 remaining an obstacle for full reopenings and a potential equity market correction," said Olivier Santamaria, head of investments for Mercer Ireland.
“With equity valuations at record highs, Irish investors continued to seek diversification and derisk, with a higher allocation to bonds and cash.
“For Irish defined contribution schemes, investors are more heavily weighted towards equity as they look to the higher returns equities can offer over the longer term to build up their pension savings.”
