DUBLIN - Irish Finance Minister Ruairi Quinn has lambasted Irish pension funds for investing too much of their assets overseas, saying huge outflows of savings have contributed significantly to high unemployment at home.
Mr. Quinn also criticized the pension fund industry for failing to provide flexible enough benefits for today's increasingly mobile workforce.
"There is a need for radical reappraisal of the current operations of pension funds in Ireland both in their rules for contributions and pension payments and in their investment policies," Mr. Quinn said in a speech last month.
Mr. Quinn implicitly warned the industry's tax status is at stake, saying it costs the government more than 250 million Irish pounds a year from tax breaks granted to funds.
Irish pension experts generally view Mr. Quinn's comments as political posturing, although they are chary about any consequences, especially with unemployment hovering around 14%.
"A politician has to be seen to be making the right noises," said Alan Broxson, director of the Irish Pensions Trust Ltd., Dublin, and chairman of the European Federation for Retirement Provision.
Rodney Smythe, a consulting actuary with MacDonagh Boland Beech Hill Ltd., Dublin, added: "My own view is it is political rhetoric and hopefully common sense will prevail."
Still, there is an element of truth in the finance minister's comments that plays well at home.
Indeed, Irish pension funds - with some I 13.7 billion ($21.9 billion) in assets at year-end 1994 - have the highest proportion of overseas investments in Europe, at 37% of total assets, according to the Irish Association of Pension Funds Ltd., Dublin. That's second in the world only to Hong Kong's 56.8% overseas allocation, according to InterSec Research Corp., London.
Irish pension funds' average foreign investments have soared since exchange controls were lifted in early 1989. At year-end 1988, Irish funds had an average 17% invested in overseas equities.
The problem for Irish pension funds is where to invest their assets, given the small size of the Irish market.
Pension funds are the largest source of capital in Ireland, exceeding banks and building societies (savings institutions).
What's more, total pension assets exceed the size of the Irish stock market. At year-end 1994, total market capitalization stood at I 15 billion. Worse, the market is highly concentrated, with the top 10 stocks accounting for 74% of the market cap, according to Davy Stockbrokers, Dublin.
The top three stocks comprise 40% of the market: two bank stocks, Allied-Irish Banks and Bank of Ireland, together comprised 27.6% of the market cap, while third-ranking Jefferson Smurfitt Group PLC accounted for 12.6%.
If Irish pension funds put their entire equity exposure of 70% into domestic equities, pension funds would end up with a 20% exposure to the banking sector and an 8.4% exposure to papermaker Smurfitt, defying diversification principles, said Paul O'Faherty, vice chairman of the Irish Association of Pension Funds and a director with William M. Mercer Ltd., Dublin.
In addition, the Irish market is heavily skewed by sector, with banking and financing stocks accounting for 37% of total market capitalization. If Irish pension funds want to get exposure to electronics or consumer goods stocks, they must invest outside of Ireland, said Mr. O'Faherty.
Nor are telecommunications stocks available on the domestic market. The Irish government is exploring selling a 35% stake in Telecom Eireann to a foreign buyer, rumored to be British Telecommunications or AT&T Co.
"The irony," Mr. O'Faherty said, is that for an Irish pension fund "to get any exposure to Irish Telecoms, what you actually would have to buy would be BT or AT&T shares."
Mr. O'Faherty added that privatization of major Irish companies, such as Irish Life and Greencore Group, have provided more opportunities for institutional investment.
But other state-owned operations, such as the Agriculture Credit Corp., and railway and bus services, could be privatized, Mr. Broxson said.
In addition, Mr. Broxson noted some of Ireland's biggest employers - including Guinness PLC, Digital Equipment Corp. and SmithKline Beecham PLC - are foreign-based companies. "Everyone expects us to invest in Guinness," which is a U.K.-listed company, he said.
Meanwhile, Irish pension funds have responded to a previous government's efforts to get them to invest more in Ireland's nascent venture capital industry.
Irish institutions committed about I 100 million, more than half of which represents pension money - enough to flood the venture capital industry over the five-year investment schedule, Mr. O'Faherty said. To date, about I 12 million has been invested, with about I 15 million more in funding agreements signed.
That level of investment has failed to satisfy the finance minister. The amount invested to date "is a very small fraction" of Irish pension assets and "is very little in the context of our labor force growth and our high level of unemployment," Mr. Quinn said.
He said the true figure of overseas investment by Irish pension funds actually might be closer to 50% of assets. "It is indisputable that a huge investment outflow of employees' savings is seen as a significant contribution to higher unemployment in Ireland," he said.
Mr. Quinn has not specified just what level of domestic investment would be appropriate. Instead, he threw the burden onto the pension industry to develop proposals to boost domestic investment. But the finance minister said pension trustees could meet their responsibilities to invest prudently and diversify adequately while increasing investment in the Irish economy. Mr. Quinn also took some swipes at the private pension system's inability to cope with changing work patterns. He said private pensions aren't geared for employees who switch jobs several times during their working life, and can't handle the growing number of part-time and temporary workers.
What irks Irish pension industry officials is they have submitted proposals to the government on both investment and plan design issues. They have asked the government to study the relationship between state pensions and private plans, as well as to examine how additional investment opportunities could be created. Industry officials are still awaiting a response from the government.
What's more, Mr. O'Faherty said the real culprit in faulty plan design is government regulations. For example, government limitations on benefits make it very difficult for workers who change jobs several times during their careers to build up a full pension, he said.
Now, the association is seeking a meeting with Mr. Quinn to sort out their differences.