IRELAND – Pension funds need not be unduly concerned in the long term by the falls in the equity markets due to their investment time horizons, John Feely, chair of the Irish Association of Pension Funds, in a letter to Irish funds on market volatility. But he acknowledges that “recent events are a cause for concern”.

Rejecting the view that equities are now inappropriate for pension funds, he says: “We do not believe this to be the case as pension planning is, by definition, a long term process typically covering time horizons of up to 40 years.”

Since pension funds are looking for returns in excess of inflation, equities, real estate and index-linked assets are important, he maintains. Looking at figures for pension fund returns, using managed investment funds figures, Feely points out that over one-year average pension funds fell by –18.9% in 2002, and faced price inflation of 5%. Over three years, the annual return was –7.8% and inflation 5.5% pa, while over five years, returns were a positive 2.4% pa, but inflation was still running ahead at 4.0%.

The good news he noted for pension funds was that over a 10-year period, the real return was 7.9%pa. It was necessary to take this long term view, he stressed. “We are not seeking to trivialise the falls that have occurred in the last three years, but to put them in a longer-term context.”

Feely also looked at the long term shift to equities by Irish funds, which in 2001 had 64% in equities, compared with 52% in 1991, while the bonds allocation had fallen to 22% from 33% in the 10 years. “The asset mix of pension funds should, therefore reflect an appropriate balance between the requirements for good long-term returns, inflation matching and shorter-term security.” The actual balance depending on the nature and maturity of the individual fund.

The letter was issued along with the publication of Part 2 of the association’s ‘Introduction to investment’ series of booklets on pension issues.