Occupational Pension Funds in Ireland: What do we know?

A guest post by Kenneth Devine (Central Bank of Ireland) on new occupational pension fund data highlighting household exposure, concentrated asset holdings and the impact of COVID-19.  [Disclaimer: This blog represents the author’s views and not those of the Central Bank of Ireland]

Pensions are the primary source of income to households in retirement. The volatility and economic shock associated with COVID-19 have compounded pre-existing issues for pension systems. These include aging populations, the low interest rate environment and the prevailing low yields on safe assets (OECD, 2020).

In a recent Behind the Data publication, Ciarán Nevin, David Mulleady and I ask the question – What do we know about occupational pension funds in Ireland?  Our note highlights the role of occupational pension funds as a household asset, outlines the breakdown of financial assets, and examines the impact of the pandemic on these holdings. An overview of the key findings can be seen in Figure 1 below.

Figure 1: Overview of key findings

While previous work by the OECD (2014) provided a comprehensive review of the Irish pension system, its analysis of occupational pension funds was constrained by a lack of data. New Central Bank of Ireland statistics covering occupational pension funds help to fill this gap by providing a better understanding of the structure and asset holdings of the sector.

We show that, in June 2020, Irish occupational pension funds had assets of €118 billion, accounting for 30 per cent of household financial assets. This is the second largest household financial asset behind currency and deposits. Household sector housing assets accounted for €542 billion in the same period.

According to the Pensions Authority’s 2019 annual report, the Irish sector consists of over 75,000 active occupational pension funds, representing almost half a million active members. This represents over 90 per cent of total euro area pension funds by number. The size, and role, of occupational pensions varies across euro area countries (Curos et al., 2020), with total assets of the pension fund sector amounting to €3 trillion at September 2020.

We have seen a transition away from Defined Benefit (DB) funds in recent years (fall of 50 per cent in number of active schemes since end-2009). For Defined Contribution (DC) pension funds, the member’s income in retirement is dependent on asset performance. Therefore, the switch from DB to DC pension funds has shifted investment risk from the corporate sector to households (Brown, 2016). Households, and their retirement income, are now increasingly exposed to financial market shocks.

The Behind the Data piece outlines that Irish pension funds primarily invest in investment funds shares and unit-linked insurance products. Combined, these two instruments account for three quarters of the sector’s balance sheet. However, structural differences in asset holdings exist across DB/DC pension funds. While the larger DB pension funds are seen to directly invest in hundreds of diverse assets, smaller DC pension funds tend to predominantly hold a limited number of investments.

Figure 2: Impact of COVID-19 on pension fund asset prices

As can be seen in Figure 2, at the onset of the COVID-19 pandemic the total value of pension fund assets fell by 6.5 percent (€7.9 billion). These asset values largely recovered across Q2 and Q3 2020 to sit at €118 billion. The movements were predominantly caused by financial market price gains and losses as the pandemic, and global policy responses, evolved. At Q3 2020, asset values were 1.8 per cent below pre-pandemic levels.

Going forward, the Central Bank will publish Pension Fund Statistics information releases on a quarterly basis. The next steps in developing this dataset will include an investigation into asset breakdowns by their sector and geography, to further explore these household investment exposures.

Researchers interested in hearing more about the data can contact Kenneth Devine.

Well it’s raining, again

With flooding back in the news today, I thought I’d take the opportunity to mention that my colleague and co-author Swenja Surminski from LSE will be giving evidence tomorrow morning (Thursday) at the Oireachtas Finance Committee hearings on the Flood Insurance Bill. Details of the session are here. You should be able to watch proceedings online here. The Flood Insurance Bill can be viewed here.