Irish Pensions Authority ‘concerned’ about investment risk in DB funds

Ireland’s Pensions Authority has said it remains “just as concerned as in previous years” about the amount of investment risk inherent in defined benefit (DB) schemes.

The authority made the remarks in its update on DB scheme statistics, in which it the said asset and liability data reported shows “very little change from the 2018 figures”.

“This risk is not borne equally by all scheme members; it is mostly concentrated on members who have not yet retired. Because so many DB schemes have closed to new members, this group is getting smaller over time, and as a result the risks are becoming more and more concentrated.

“When the IORP II Directive1 has been transposed into Irish law, the authority will subject all schemes to a periodic supervisory review. As part of this, the authority will undertake an assessment of the risks faced by the pension scheme and the ability of scheme trustees to assess and manage those risks,” the authority stated.

In addition, it stressed that it will not be enough for trustees to explain their current approach to risk management. Instead, they will be expected to demonstrate that they have undertaken an objective and informed process, including consideration of alternatives and an assessment of the effect of potential risks on different classes of members.

Despite the authority’s concerns, Irish DB funds reduced their exposure to equities in 2019. On average, the funds had 24.5 per cent of their portfolio invested in equities compared to 28.4 per cent in 2018. There was a slight increase in investments in EU sovereign bonds, rising to 34.8 per cent from 33 per cent. The funds also increased their investments in other bonds to 9.6 per cent from 9 per cent.

In regards to other investments, property holdings remained the same at 4.8 per cent, cash slightly increased to 3.6 per cent from 3 per cent, net current assets dropped to 0 per cent, from 0.1 per cent, with profit insurance policies remained at 0 per cent, and other assets increased to 22.7 per cent, up from 21.7 per cent.
Trustees of DB schemes subject to the funding standard provisions of the Pensions Act, 1990 (the Act) are required to submit an Annual Actuarial Data Return (AADR) to the Pensions Authority within 9 months of the scheme year end.

Analysis of this data by the authority found that the number of continuing DB schemes subject to the funding standard is 570, a decline of 2 per cent since last year. The total assets figure for these schemes was €65.3bn and funding standard liabilities totalled €58bn (excluding funding standard reserve liabilities).

Eighty-six per cent of continuing schemes were reported as meeting the funding standard provided for in section 44(1) of the Pensions Act, 1990. Seventy-six per cent of schemes were reported to hold sufficient additional resources to satisfy the funding standard reserve provided for in section 44(2) of the Pensions Act, 1990.

Commenting on the figures, Irish Association of Pension Funds (IAPF) CEO, Jerry Moriarty said: "Overall the figures show a positive picture with 86 per cent of schemes satisfying the funding standard and those showing a considerable aggregate surplus of assets over liabilities. This reflects the work done by trustees and often difficult decisions for trade unions and members to agree recovery plans to get schemes back to funding.

"There has also been a significant shift in asset allocation with less than a quarter of assets now invested in equities. We believe the funding reserve, which requires additional reserves for investments in anything other than sovereign bonds or cash is very narrow, and doesn’t encourage or reward schemes that engage in other risk mitigation strategies such as liability driven investment."

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