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IAPF Calls for Radical Rethink of Regulatory Approach to Pensions as QE Impact Expected To Last Years

28/03/2015 Posted by IAPF

Quantitative Easing is a huge challenge for Ireland’s Pension Schemes

With the impact of Quantitative Easing (QE) predicted to last years, attendees at the IAPF Annual Investment Conference have been told that a significant review of the Pension Authority’s approach to regulation is necessary. Representatives from over 70 of Ireland biggest pension schemes and companies gathered together at the Conference which took place this morning in the Printworks, Dublin Castle. The conference looked at the impact of QE and lower bond rates on DC and DB schemes, on both assets and liabilities. Attendees learned of the regulatory implications and challenges facing trustees to mitigate the QE challenge.

According to Jerry Moriarty, CEO of the IAPF, “Defined Benefit (DB) schemes have made significant strides in recent years, with 60% now meeting the required level of funding standard. Unfortunately, the impact of QE is effectively reversing those gains. Low yields on bonds drive up the value of liabilities wiping out the significant investment gains that have occurred since 2009. In addition trustees are under regulatory pressure to de-risk by buying more bonds at a time of negative yields and with the ECB active in the market further pushing down yields. The regulator is also introducing Risk Reserves in 2016 which penalises schemes that don’t have bonds. These requirements need to be reviewed to take account of the artificial and unprecedented conditions in bond markets today.”

David Greene of Pioneer Investments, one of the keynote speakers at the event said, “Pension schemes are between a rock and a hard place. When weighing up the risk & return comparison between equities and bonds, there’s no clear way forward. While there may be a temptation to switch some assets to equities in order to reduce the impact of QE, we’re now in the longest post-war US equity bull market in history, which wouldn’t encourage pension scheme trustees to switch to equities to avoid the impact of QE. There’s a balancing concern that this could come to an abrupt end with a significant correction. I don’t envy the decisions that pension trustees are faced with.

Colm Fitzgerald, Lecturer at DCU who also spoke at the Conference, recounted how a tiny number of well-funded schemes may benefit, but insolvent DB schemes will be most negatively impacted, “Overfunded pension schemes (the rich ones) have more assets than liabilities – so the value of these assets will increase by more than the liabilities – so they’ll be better off, with underfunded pension schemes (the majority – the less well-off) have assets less than their liabilities – so the value of the liabilities will increase by more than the assets – so they’ll be worse off. These schemes effectively have negative wealth. They will directly and indirectly suffer to a greater extent from QE. The unfairness and inequity of QE has been and will continue to be greatest for underfunded pension schemes”.

Jerry Moriarty concluded, “Unless there is a review of the regulatory approach there is a greater likelihood of a further acceleration of DB closures. It is crucial that there is a strong regulatory framework so that people can have secure pensions. However that framework must be adaptable and take into account the changing market dynamics. ”

Other contributors to the event included:

  • Vincent McCarthy , Senior Investment Consultant, Invesco
  • Jim Foley , Executive Director, Trustee Decisions
  • Jonathan Bull , Chairman, OPDU
  • Padraig Flanagan , Senior Investment Consultant, Towers Watson
  • Howard Kearns , Head of LDI EMEA, State Street Global Advisors
  • Barry Holmes , Director of Human Resources, RCSI
  • Brian Delaney , Senior Investment Consultant, Aon Hewitt
  • Noel O'Halloran , Director - Chief Investment Officer (CIO), Kleinwort Benson Investors
  • Olivier Santamaria , Partner, Mercer
  • Stephanie Flanders , Chief Market Strategist for UK and Europe, JP Morgan

Editors Notes 
The IAPF represents pension savers and works to ensure people can have pensions that are secure, fair and simple. The IAPF Investment Conference was sponsored by Pioneer Investments and OPDU.

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