Pension funds continuing to reduce exposure to equities

Irish pension funds are continuing to reduce their exposure to equities in a bid to lower the risk levels for their schemes, according to data from consulting group Mercer.

Its 2016 asset allocation survey shows that equities now make up 36 per cent on average of asset allocations by Irish pension schemes, down from 38 per cent in 2015 and 40 per cent in the previous year.

The Irish figure compares with an average allocation of 31 per cent for equities across Europe.

The survey showed that Irish defined benefit pension schemes now have an average bond allocation just below 50 per cent. This suggests schemes are generally retaining existing low-yielding bond assets to manage risk, but have started to allocate to markets which offer higher yields, such as corporate bonds and non-euro zone government bonds.

Market uncertainty

“It is encouraging to see Irish pension schemes focus on strategic risk management and respond to increased market uncertainty by continuing to reduce their equity allocations” said

Paul Kenny

, a partner with Mercer. “Equities remain an important part of pension schemes’ portfolios but high allocations are too risky for the vast majority of Irish defined benefit schemes”.

And he noted that low euro zone government bond yields are causing major problems for Irish defined benefit pension schemes.

The Pensions Authority would ideally like Irish schemes to increase their allocations to euro zone government bonds. However, the ECB's Quantitative Easing programme and market reaction to Brexit has massively increased the price of these bonds, Mr Kenny said.