Geared funds bear 'obvious' risk

Pension funds are unlikely to fuel a new boom in property investment despite new rules allowing occupational pension schemes to borrow, the Irish Association of Pension Funds (IAPF) has said.

The IAPF also warned individual savers not to overexpose their pensions to geared investment funds.

In a measure introduced in this year's Finance Act, pension funds are now allowed to gear their portfolios directly, or borrow to invest in funds that are expected to generate returns higher than the rate of interest paid on the borrowed money.

However, the risks of "significant" loss occurring if the return on the investment is lower than the cost of borrowing are obvious, according to an IAPF paper published yesterday.

"Individuals should be very wary of employing high levels of gearing within pension schemes which represent the bulk of their retirement provision," the IAPF paper cautions.

Holders of small, self-administered pension schemes (SSASs) can now borrow to invest in property and were the group likely to be most interested in the new measure, according to Mr Joseph O'Dea, of consultants Watson Wyatt, and the IAPF investment committee.

A number of companies have marketed new investment products that take advantage of the measure.

The chairman of the IAPF Investment Committee, Mr Pat Lardner, said occupational schemes would probably keep the proportion of property assets in their funds at the current typical level of 10 per cent.

"Leverage allows investors to gain exposure to the upside potential of investments larger than the value of their capital," Mr Lardner said.

"However, the investor cannot gain exposure to this upside potential without also being exposed to the risk of the larger investment," he added.

The IAPF said it would be "difficult to justify" why any fund-holding fixed-interest investments such as bonds would also choose to borrow, as the underlying economic exposure would be the same as if the fixed interest investment were sold and used to buy the property investment without the need for gearing.