Almost 25% of Irish DB Funds Will Be Gone By Next Year

Research from the Irish Association of Pension Funds has found 10% of final salary pensions have already wound up.

(October 1, 2013) – Defined benefit (DB) pension funds are becoming a rare breed in Ireland, with around a quarter expected to have closed in the next year.

The Irish Association of Pension Funds (IAPF) has estimated that 10% have already closed entirely, with a further 14% planning to shut in the next 12 months.

In addition, just 8% of Ireland’s DB funds are open to new members.

Ireland’s pensions industry is going through a period of immense change: not only is there the beginnings of a widespread shift to the market becoming defined contribution dominated, but the government has continually tinkered with pension savers in an effort to get the nation’s economy back on its feet.

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The latest proposal put forward by the government would allow tax relief only on pensions delivering retirement income of up to €60,000, potentially affecting more than 30,000 pension savers, according to PricewaterhouseCoopers.

IAPF Chairwoman Rachel Ingle told the Irish Times: “We need to ensure we can have a pension system in Ireland that is secure, fair and simple. Huge sums have already been extracted from pension savers through the pension levy and this is clearly impacting their ability to survive.”

The pension levy was introduced in May 2011 to finance job creation and pay for tax cuts to keep Irish businesses going. Around €1.9 billion has been raised so far.

Ingle continued: “It is time to stop regarding people’s retirement savings as a source of short-term tax revenue when it’s far more important to ensure we encourage people to save for the future in order to prevent a bigger crisis down the line.”

The Irish Budget for 2014, when any changes to the pension levy and tax relief changes will be announced, is to be delivered on 15 October, 2013.

Related Content: Irish Ministry Calls for Pension Overhaul and Irish Government Slammed for Failing Pension Funds

How to Pick the Right Fund Managers

If mean reversion theory means the good ones will eventually falter, how can you select the right manager for your money?

(October 1, 2013) – We know we shouldn’t, but it seems we still do: Aon Hewitt EnnisKnupp has reminded investors about the dangers of only looking at recent performance when selecting a fund manager.

Analysis carried out by the consultancy of outperforming and underperforming fund managers across the world showed the idea of mean reversion to be factually correct, meaning what performs well today won’t necessarily perform well tomorrow.

Mean reversion theory suggests that strong periods of outperformance can be followed by less attractive results, and that frequently strong periods of underperformance can be followed by improved returns.

The study looked at two distinct groups – equity managers which were below benchmark performance after looking at five years’ worth of returns up until 30 June, 2008, and those equity managers who outperformed over the same period.

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EnnisKnupp then tracked the performance of both groups, relative to benchmark, in the subsequent five years to June 30, 2013.

The data, provided by eVestment Alliance, showed that those underperforming managers saw their returns improve, while the high flyers saw their returns fall.

“These trends can directly impact client portfolios when making decisions about hiring and firing managers. Typically clients terminate managers after periods of underperformance. Our analysis shows that investors can be better off by being patient with underperforming managers, especially those that have not experienced material changes in staff or process,” wrote Chris Riley, associate partner at EnnisKnupp.

“Investors are also better off selecting managers based on criteria other than just chasing past returns; managers that are hired after a strong run of outperformance often have difficulty sustaining significant levels of outperformance.”

The full report can be found here.

It’s not just investors who are accused of getting the hiring and firing decisions wrong though: on an equal-weighted basis, US equity funds recommended by consultants underperformed other funds by 1.1 % a year between 1999 and 2011, according to analysis by Oxford University’s Said Business School.

Mitesh Sheth, consultant at Redington, accepted that some consultants were guilty of box-ticking when it came to manager research, but stressed there were ways of “getting under the bonnet” and choosing the right fund manager.

Sheth said: “Fund managers are hugely incentivised to say the right thing and to avoid saying anything that might cause concern. The rewards for getting it right are massive and the cost of getting it wrong is bigger.

“Fund managers get coached, briefed and trained ahead of due diligence research visits. Only the best communicators are usually presented to researchers. This understanding is so ingrained that roles and promotions often depend critically on communication skills in consultant and client meetings. These many layers of polish take some getting through.”

To cut through the polish, Sheth recommends doing the following:

1) Compare stories for accuracy across different individuals in a team or have face-to-face meetings with all the managers of a particular strategy/sector in a short period of time;

2) Interview people at all levels of a company from CEOs, to fund managers and analysts, to risk managers, operations, and support;

3) Retain an element of surprise and visit managers at short notice; and

4) Appeal to the “better angels” of fund managers’ nature, and share your own research, on the chance that it moves the discussion towards an honest basis of engagement.

You can read more of Sheth’s tips here.

Related Content: Active Management: The McDonald’s of Investing? and Blurred Lines Between Consultants and Asset Managers Most Pronounced in the UK 

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