Occupa ional Pension Schemes in I eland – A Re iew o Risk and
In es men S a egies
Jim S ewa , T ini y College Dublin, and
B idge McNally, Na ional Uni e si y o I eland, Maynoo h.
E-Mail
[email p o ec ed]
[email p o ec ed]
Abs ac 1/5/03
The pensions indus y is a mul i – billion eu o indus y wo ld wide. As a Decembe
2002, I ish pension und asse s unde managemen (no including he Go e nmen
Pension ese e Fund) we e o he o de o 50,618.5m. Eu o. Recen s ock ma ke
pe o mances coupled wi h a numbe o high – p o ile co po a e ailu es ha e ocussed
a en ion on he ulne abili ies o unded pension sys ems. This pape looks a he ole o
unded occupa ional pension schemes in I eland and speci ically a he isks inhe en in
bo h he in es men s a egies o hese schemes and he ins i u ional s uc u e o pension
und p o ision. I ques ions whe he pension unds by emb acing hese isks a e se ing
he objec i es o he indi idual bene icia ies o he schemes, he us ees and he sponso
companies.
1
Occupa ional Pension Schemes in I eland – A Re iew o Risk and
In es men S a egies
Jim S ewa , T ini y College Dublin, and
B idge McNally, Na ional Uni e si y o I eland, Maynoo h.
2
Occupa ional Pension Schemes in I eland – A Re iew o Risk and
In es men S a egies.
Focus o pape
This pape looks a he ole o occupa ional unded pension schemes in I eland, in he
p o ision o pensions. I speci ically looks a he isks associa ed wi h hese schemes,
om ins i u ional isk o in es men s a egy isk. Mos academic discussion o isk
ocuses on ma ke isk, in pa icula isk om equi y in es men . This pape howe e
a gues ha isk also lows om he ins i u ional s uc u e o pension und p o ision. The
pape concludes ha he “secu e in es men ” ag, adi ionally associa ed wi h pension
scheme a angemen s may be oo simplis ic due o a a ie y o isk ac o s.
In oduc ion
The o ecas inc ease in he cos o old age pension p o ision and possible u u e
di icul ies in unding pensions in many coun ies, is a his s age well documen ed.
“Rapid demog aphic ansi ions caused by ising li e expec ancy and declining e ili y
mean ha he p opo ion o old people in he gene al popula ion is g owing apidly”
(Wo ld Bank-1994 –Fo ewo d). Changing labou ma ke s, in pa icula educed
pa icipa ion in he labou o ce by males o e 50 (Disney, 1996 p. 193, p. 225) due o
ea ly e i emen and/o disabili y also con ibu es o he dependency a io. In mos
de eloping coun ies, an in o mal sys em whe eby child en ca e o hei aged pa en s
and income ans e s low be ween gene a ions in bo h di ec ions, is s ill he mains ay o
p o ision in old age. Bu in many coun ies, economic de elopmen has esul ed in he
in o mal a angemen s gi ing way o o mal ma ke a angemen s and o a ying deg ees,
manda o y go e nmen p og ammes (Wo ld Bank, 1994, ch.2).
The widely e e ed o epo by he Wo ld Bank (1994) “A e ing he Old Age C isis –
Policies o P o ec he old and P omo e g ow h”, iden i ies in i s o e iew, h ee
unc ions o old age secu i y sys ems – edis ibu ion, sa ing and insu ance. The s udy
sugges s ha inancial secu i y o he old and economic g ow h would be be e se ed i
Go e nmen s de eloped h ee sys ems o “pilla s” o old age secu i y; a publicly
managed sys em wi h manda o y pa icipa ion and a limi ed goal o educing po e y
among he old (social secu i y pension), a p i a ely managed manda o y sa ings sys em
(a pension plan ei he a pe sonal sa ings o occupa ional plan), and olun a y sa ings (a
pe sonal sa ings o occupa ional pension plan). One o hese policies, he de elopmen
o p i a ely managed unded pensions, has also been ad oca ed by Go e nmen s, he
Eu opean Commission and he pensions indus y in many coun ies, including I eland.
In de eloped coun ies and mos low and middle- income coun ies, Go e nmen s ha e
de eloped o mal pension a angemen s o some deg ee. Key o he ype and na u e o
each sys em is Go e nmen policy on a numbe o policy issues iz:
3
 Whe he p ima y eliance should be on olun a y o manda o y mechanisms;
 The eplacemen a es buil in o he design o social secu i y and p i a e pension
bene i s;
 The balance o be a ained be ween po e y alle ia ion and edis ibu ion, sa ing and
income smoo hing.
 Wha elemen s o insu ance should be p o ided.
 How he sys em should be inanced – unded o on a pay as you go basis.
 Should he sys em be managed publicly o p i a ely.
The cu en pa e n ac oss Eu ope and he US is summa ised in he Table (1) below:
Table 1
I eland Social secu i y old age con ibu o y and non – con ibu o y
pension. Volun a y employe p o ided occupa ional pension
a angemen s – la gely de ined bene i . P i a e pe sonal pensions
also a ailable.
UK. Low le el o S a e pension, complemen ed by olun a y employe
p o ided, de ined bene i unded sys em. P i a e pe sonal
pensions also a ailable.
Sweden Minimum S a e pension, complemen ed by publicly managed
manda o y de ined con ibu ion sys em. Also la ge and uni ied
olun a y occupa ional pension and pe sonal pensions sec o .
No way Fla a e S a e pension complemen ed by manda o y ea nings
ela ed de ined bene i public pension o en i e wo k o ce. Fai ly
la ge olun a y occupa ional pension and pe sonal pension sec o .
Denma k Means es ed basic pension. Manda o y small la – a e
con ibu o y pension in he p i a e sec o . La ge agmen ed
occupa ional and pe sonal pensions sec o .
Ne he lands T ansi ion om a manda o y public scheme o a olun a y
p i a ised one.
F ance Compulso y de ined bene i pay as you go sys em.
USA Compulso y h ee ie plan o all ede al employees – basic
social secu i y, a de ined bene i plan and a de ined con ibu ion
plan. In he p i a e sec o de ined con ibu ion plans (401(k)) a e
by a he mos popula
Sou ce: Reyna d e al. eds, (1996 p.16-23, p.40-48, p.127-136, p.154-162, p221-231), Hughes and
S ewa ,eds, (2000 p.147-160,p.180-192)
Cu en ly abou one in e e y ou pe sons and mo e han one hi d o he wo king age
popula ion in OECD coun ies a e co e ed by an occupa ional pension. In I eland,
co e age o hose in employmen , aged 20 o 65 s ands a app oxima ely 50% (CSO) and
is inc easing. The pensions indus y is a mul i–billion eu o indus y wo ld wide. As a
4
Decembe 2002, asse s managed on behal o I ish pension unds s ood a 50,618.5
million eu o (IAPF, 2003)).
As a Decembe 2000, he e we e 86,348 pension schemes egis e ed wi h he I ish
Pension Boa d wi h a o al membe ship o 629,801. O his, 180,690 indi iduals we e
membe s o de ined con ibu ion schemes while he e we e 449,111 membe s o de ined
bene i schemes. The end howe e is owa ds de ined con ibu ion schemes wi h a
signi ican numbe o one- membe schemes being egis e ed du ing 2000. Table (2)
gi es mo e in o ma ion on he membe s o occupa ional pension schemes.
Table 2 Membe s o Occupa ional Pension Schemes Supe ised by he Pensions Boa d
yea Membe s
o all
pension
schemesa
‘000
D.B.
Only
‘000
D.C.
Only
‘000
Pension
und
asse sb
Eu o
Billion
Asse s
as %
o GDP
To al a
wo kc
‘000
Es ima ed
pension
co e age
pe cen
2000 630 449 181 53.9 66 1710 36.8
1995 478 405 78 20.8 50 1239 38.6
Sou ce: Connell, P. and S ewa , J. ( o hcoming).
No es
a - This da a e e s o occupa ional pension schemes and includes bo h public sec o PAYG schemes as well
as unded o pa ly unded schemes. The da a ela es o membe s o pension schemes moni o ed by he
Pensions Boa d. Sou ce: Va ious issues o Annual Repo o he Pensions Boa d.
b - Sou ce: Shane Whelan, (2001) I ish pensions Funds: Size G ow h and Composi ion o Asse s, Dublin:
Shane F. Whelan & Co.
c - C.S.O. Qua e ly Na ional Household Su ey Sep - No . 2000, Feb. 2001 and 1995 Na ional Labou
Fo ce Su ey, 1996.
Occupa ional Pension Schemes – S uc u e and Regula o y F amewo k.
Occupa ional pension schemes a e p i a ely managed pension schemes o e ed by
employe s o some o all employees as pa o an o e all emune a ion package. O en
acili a ed by ax concessions and egula ed by Go e nmen s, hei objec i e is o p o ide
a a ge ed le el o income on e i emen in mos si ua ions complemen ing social
secu i y.
Occupa ional pension schemes in I eland a e mainly se up as us s. Acco dingly, hey
a e p ima ily go e ned by T us law. Howe e his is supplemen ed by he Pensions Ac
1990, and he Pensions Amendmen Ac , 1996. In addi ion, occupa ional pension
schemes a e subjec o employmen law, ax law, insu ance law, social wel a e law and
mo e ecen ly amily law.
Many schemes in es hei unds and p o ide bene i s h ough some o m o insu ance
con ac . A a minimum, ce ain con ingencies, e.g. dea h o disabili y o membe s a e
5

insu ed by he pension scheme. The s anda d ype o in es men s uc u e used is ei he a
uni –linked insu ance con ac o a wi h p o i con ac . In he uni linked a angemen ,
he scheme would buy uni s in one o he in es men unds o he insu ance company e.g.
he I ish Equi y und, he ixed in e es und o pe haps a managed und inco po a ing a
b oad mix o asse s. The alue o he scheme’s uni s would luc ua e wi h he alue o he
unde lying und. The asse s in he unde lying und emain he p ope y o he insu ance
company, he scheme’s asse s a e he uni s i holds in he und. A wi h p o i con ac will
o some ex en gua an ee a bene i a e i emen equi alen o a speci ied a e o e u n.
Whe e in es men pe o mance exceeds he a e gua an eed, he insu ance company may
decla e an addi ional bonus, assuming asse s in es ed ea n abo e his minimum a e.
Howe e , in 2002 and so a in 2003 many wi h p o i con ac s ha e ei he no decla ed
an addi ional bonus, o educed p ojec ed payou s.(P uden ial, No wich Union, S anda d
Li e, Legal & Gene al and Sco ish Widows.).
The pension scheme could howe e manage i ’s unds i sel and no go he insu ance
ou e. Typically, in his si ua ion, he scheme would place i s unds wi h one o mo e und
manage s ha ing ag eed in ad ance, in es men s a egies and key pe o mance
indica o s.
Acco dingly he in es men ou e migh be ep esen ed as in Figu e (1).
Figu e (1)
Cash lows o pension
Pension Fund
I ish Go Bd
I ish P ope y
No h Ame ican Equi ies
I ish Equi ies
Fixed In . Fund
I ish Equi y Fund
Managed Fund II
Managed Fund I
ENRON
AIB
Eu ozone Bond
AIB
BOI
In es s ia und manage
In es h ough managed unds
*
In es in speci ic sec o / mk *
Pensione s
Insu ance Company Pensione
Pays pensions di ec ly
Pu chases annui y
*May inco po a e an insu ance con ac
Pays
pension
6
RISK FACTORS
Ins i u ional Risk
Pension con ac s a e long e m, a con ac w i en now may no be exe cised o 40 yea s
and las o a u he 20 yea s. Fo many pension con ac s isk is me ely a unc ion o
in es men policy, bu o hose pension con ac s ha in ol e indi ec in es men ia an
insu ance company o a und manage (s) o indeed whe e he membe s pension is unded
by he pu chase o an annui y, he e a e o he hi d pa y isks. Fo ins ance, he ou come
o a con ac aken ou wi h an insu ance company is in no small pa dependan on he
con inued exis ence o ha company’s business (albei in pe haps a di e en legal o m).
I is di icul o hose en e ing con ac s wi h an insu ance company o know he na u e
o o he con ac s which may (in dis ess si ua ions) ake p ecedence in he dis ibu ion o
in es men e u ns (as in he Equi able Li e Case), o whe he con ac s a e w i en based
on assump ions abou longe i y which a e alse (as in he B i annic Insu ance case
(Gua dian Newspape s, 7/1/03). Insu ance companies a e also exposed o unce ain y
whe e he s a is ical dis ibu ion o ou comes is no known. Indeed gi en unce ain y he
long un su i al o insu ance companies is puzzling. P o i able insu ance con ac s
canno be w i en o some hing ha is ce ain, bu equally so o an e en ha is
unce ain.
While pension und us ees may conside di ec in es men using a selec ed und
manage o a numbe o und manage s a mo e “hands on” app oach which gi es hem
g ea e in ol emen and con ol, coun e -pa y isks emain. Conside he si ua ion whe e
he p ima y und manage in es s scheme monies in a und ope a ed by ye ano he hi d
pa y und manage (e.g. an I ish und manage migh in es in Fa Eas equi ies ia a
Fa Eas equi y und ope a ed by an o e seas und manage ). The pension scheme now
has in addi ion o he coun e – pa y isk associa ed wi h he p ima y und manage , he
isk associa ed wi h his addi ional hi d pa y.
Many schemes whils using he di ec in es men app oach, und membe s pensions on
e i emen by pu chase o an annui y a he han paying he pension di ec ly ou o he
scheme. Un il he di icul ies o Equi able Li e he inhe en isk in his o he membe s
would ha e been seen as heo e ical only. Tha iew is changing.
Pe haps he g ea es isk, which scheme us ees ha e o con end wi h, is likely o a ise
om he quali y o managemen in bo h he p ima y insu ance/ und managemen
p o ide s and he a ious sub- p o ide s. I is e y di icul o judge he na u e o hese
isks bu hey none heless exis .
7
In es men S a egies:
As a end 2001, he po olio o asse s in es ed in by pension unds was as shown in
Table (3). This able shows ha li le mo e han 25% o he o al unds unde
managemen we e in es ed in ixed in e es s ocks and cash ins umen s. Less han 10%
was in es ed in p ope y whils o e 60% was in es ed on he s ock ma ke . Gi en ecen
inancial his o y – h ee yea s o alling s ock ma ke s and ma ke ola ili y s ock ma ke
in es men s ha e p o ed e y isky. I would be in e es ing o su ey pension und
membe s on wha hei p e e ed in es men choice would be – he low isk e u n wi h
li le o no su p ises (pleasan o unpleasan ) on e i emen , o s ock ma ke specula ion
wi h he consequen highs and lows ha his en ails. I is p obably ai o say ha ew
employees, i hey hough abou i , would be happy o in es as much as 60% o hei
pension con ibu ions in he s ock ma ke and inc ease he isk o being se iously unde
p o ided o a a ime when hei ea nings capaci y is nil o a bes e y ulne able.
Pension unds a e conce ned wi h e i emen income p o ision, based on a se o p e-
de ined c i e ia including p ojec ed e u ns on capi al in es ed. They should no be
conce ned p ima ily wi h specula ion. I is puzzling he e o e why hei unde lying
in es men s a egies, inco po a e p ac ices which could po en ially diminish e en he
o iginal capi al amoun s in es ed?
8
Table (3)
Asse Po olios by I ish pension Funds
Asse Type Ma ke Value –eu o millions %
Asse Dis ibu ion by Sec o
I ish
Fixed In e es – Go e nmen . 1,989.8 3.9
Fixed In e es – Co po a e 299.2 0.6
Indexed Linked 137.8 0.3
Equi ies – quo ed 7,862.6 15.5
Equi ies – unquo ed 96.5 0.2
P ope y 4,318.6 8.5
Fo es y 163.3 0.3
Cash and cash ins umen s 967.5 1.9
O he 364.2 0.7
To al 16.199.5 32.0
Non – I ish – Eu ozone ex I eland
Fixed In e es – Go e nmen 6,729.3 13.3
Fixed In e es – Co po a e 729.4 1.4
Equi ies 7615.2 15.0
P ope y 28.4 0.1
Cash and cash ins umen s 520.2 1.0
O he 89.7 0.2
To al 15,712.2 31.0
Non I ish – Wo ld ex Eu ozone
Fixed In e es – Go e nmen 924.5 1.8
Fixed In e es – Co po a e 191.7 0.4
Equi ies – UK 4,312.8 8.5
Equi ies US 8,240.8 16.3
Equi ies Eu ope – Ex Eu ozone 1,560.2 3.1
Equi ies Paci ic Basin (ex Japan) 1,488.9 2.9
Equi ies Japan 1,426.1 2.8
Equi ies o he o e seas 91.9 0.2
P ope y 113.9 0.2
Cash and s umen s 86.1 0.2
O he 270.1 0.5
To al 18,706.9 37.0
O e all To al 50,618.5 100
IAPF Asse Alloca ion su ey.
Indus y igu es o pension und pe o mance o e he pe iod 1990 o 2002 a e e en
mo e elling.
9
Re e ences:
Ande sen Pension und In es men Bulle in –2002
And ews E.S. and Hu d M.D.(1992), “Employee bene i s and e i emen income
adequacy”, in Bodie Z. and Munnell A.H. (eds) “Pensions and he Economy”: Pension
Resea ch Council and Uni e si y o Pennsyl ania p ess: Philadelphia.
ApRobe s L., “Pension Plans and Theo ies o he U.S. Labo ma ke ”, in Reynaud E.
apRobe s L, Da ies B. and Hughes G., “In e na ional Pe spec i es on Supplemen a y
pensions. Ac o s and Issues”. Quo um Books Wes po : Connec icu London.
Blake D (1994b) – “Pension Schemes as op ions on Pension Fund asse s: Implica ions o
Pension Fund Asse Managemen ”, mimeo Bi kbe k college, London.
Bodie Z, Sho en J.B. & Wise D.A. (1987), “Issues in Pension Economics”. The
Uni e si y o Chicago P ess.
Commission on Public Se ice Pensions – Final Repo . (2000)
Connell, P. and S ewa , J. “Income o Re i ed pe sons in I eland: Some E idence
om Household Budge Su eys”, in in G. Hughes and J. S ewa (eds),
Re o ming pensions in Eu ope: E olu ion o Pension Financing and Sou ces o
Re i emen Income, Alde sho , UK and B ook ield, US: Edwa d Elga , pp. 140-
156.
Da is, E.P. (1996), “Pension Funds Re i emen -Income Secu i y and Capi al Ma ke s An
In e na ional Pe spec i e”, Ox o d: Cla endon P ess..
Disney R.(1996), “Can we a o d o g ow olde ? . A Pe spec i e on he Economics o
Aging”; The MIT P ess: Camb idge, Massachuse s London.
F iedman B.M.and Wa schawsky M. (1990)- “Annui y p ices and sa ing beha iou in he
US”, in Bodie Z., Sho en J.B. and Wise D.A. (eds) “Pensions in he US Economy”:
Uni e si y o Chicago P ess.
F io B. – (Yea Published) “The O igins o F ench Supplemen a y Pension Plans:
The C ea ion o he Gene al Associa ion o Pension ins i u ions o Cad es (AGIRC)” in
Reynaud E. apRobe s L, Da ies B. and Hughes G., “In e na ional Pe spec i es on
Supplemen a y pensions. Ac o s and Issues.” Quo um Books Wes po : Connec icu
London.
IAPF (2003) – Asse Alloca ion su ey – 2002, Dublin: I ish Associa ion o Pension
Funds.
16

Lu jens E, (Yea Published) “Supplemen a y Pensions in he Ne he lands” in
Reynaud E. apRobe s L, Da ies B. and Hughes G., “In e na ional Pe spec i es on
Supplemen a y pensions. Ac o s and Issues”. Quo um Books Wes po : Connec icu
London .
Me ce In es men Consul ing – Ma ke Insigh epo – 2002 (Full Re e ence)
Minns R. and Ma in.R – “Pension Funds in he Uni ed Kingdom: Cen alisa ion and
Con ol”, in Reynaud E. apRobe s L, Da ies B. and Hughes G., “In e na ional
Pe spec i es on Supplemen a y pensions. Ac o s and Issues”. Quo um Books Wes po :
Connec icu London .
O ice o Fai T ading (1997), Repo o he Di ec o Gene al’s Inqui y in o Pensions,
ol. 1, London: O ice o Fai T ading, a ailable a h p://www.o .go .uk/.
O e bye E. (Yea Published) “The impac o Indus ial ela ions on he s uc u e
o Supplemen a y Pensions in Scandina ia” , in Hughes G. and S ewa J., “Pensions in
he Eu opean Union: Adap ing o Economic and Social Change”. Kluwe Academic
Publishe s: Bos on/Do d ech /London.
Os up F. “The De elopmen o Supplemen a y Pensions in Denma k”in Reynaud E.
apRobe s L, Da ies B. and Hughes G., “In e na ional Pe spec i es on Supplemen a y
pensions. Ac o s and Issues.” Quo um Books Wes po : Connec icu London .
S ewa J. (1999) - “Pension Funds and Capi al Ma ke s”. Pape gi en a Policy Ins i u e
Semina se ies in Public Policy, No embe 1999.
Teppe . I. (1992) –Commen on Bodie and Papke in . Bodie Z. and . Munnell A. (eds),
“Pensions and he US Economy” (Pension Resea ch Council: Uni e si y o Pennsyl ania,
Philadelphia).
Wadensjo E , “The New Swedish Pension Sys em”, in Hughes G. and S ewa J.,
“Pensions in he Eu opean Union: Adap ing o Economic and Social Change”. Kluwe
Academic Publishe s:: Bos on/Do d ech /London.
Wo ld Bank Policy epo (1994)– A e ing he old age C isis.- Policies o p o ec he old
and p omo e g ow h. Ox o d: Ox o d uni e si y P ess.
17
E en hough e u ns ha e on a e age been nega i e o e he las h ee yea s, cos s
o managing all pension schemes ha e been posi i e, as hey a e pa ly
de e mined by unds unde managemen no und pe o mance. Fo example wi h
he new PRSA scheme managemen cha ges can be as high as 5% o unds
con ibu ed and a u he 1% o unds managed. Cha ges o wha a e desc ibed as
‘non-s anda d’ PRSAs can be e en highe . Pension managemen cha ges can be
e en highe o indi idual schemes such as AVC schemes. I is easy o see ha
wi h alling o p ojec ed s a iona y equi y ma ke s, and low e u ns on
Go e nmen deb , he main bene i s o pension policy holde s comes om he
S a e h ough ax elie . Al hough as holde s o equi y linked Special Sa ings
Accoun s ha e disco e ed, e en wi h a S a e con ibu ion o 25% o he amoun
in es ed, e u ns may s ill be nega i e.
18
19