The total value of Irish pensions fell by almost 16% last year, according to new figures.
Rising interest rates and the geo-political uncertainty caused by the war in Ukraine wiped significant value off pension funds around the globe.
At the end of 2022 Irish pension assets were worth around €157 billion, having increased by an average of 4.6% a year over the last decade until last year.
Globally, pension values fell by just under 17% last year, with around $47.9 trillion tied up in pension assets internationally.
The figures are contained in the latest Global Pension Assets Study, which was carried out by advisory firm WTW and the Thinking Ahead Institute.
Speaking on Morning Ireland, Padraig Flanagan, Senior Director for Investment in Ireland at WTW explained why pension assets have dropped.
“The driver is a common one – inflation globally and the response of Central Banks.
“Central Banks have been raising interest rates and this weighs upon returns and things like equities or company shares, and on Government bonds which are the core of how pension schemes tend to invest,” he said.
When asked if pension assets will continue to drop this year, Mr Flanagan said that depends on the action of Central Banks around the world.
“That will be dictated by how well central banks navigate some key issues – so will they tame inflation and at the same time how will they deal with the side effects of high interest rates,” he said.
So, where does the majority of Irish pension money go?
Mr Flanagan said for most Irish pension schemes, it is typical to have 70-75% across company shares and equities, and Government bonds.
But he said they have seen a growing trend towards the diversification into other areas.
“We’ve seen pensions schemes trying to find additional returns by investing into things like real estate, critical pieces of infrastructure and lending to a broader range of borrowers in the economy,” he said.
Mr Flanagan said he expects that will remain a feature of how schemes invest, as they try to better manage risk and give more stable returns to savers.
Today’s pensions report shows a significant drop in the percentage of Irish money invested in pensions relative to GDP over the past decade.
In 2012 pension savings were equal to 47% of GDP. This fell to just 32% in 2022 and is well behind the global average of 60%.
On this point, Mr Flanagan said it is important to remember that the Irish economy has more than doubled in size in the last decade.
“So pension assets have been growing nearly 5% per annum but it hasn’t kept pace with the growth in the economy,” he said.
“The other major challenge is the level of participation in pension savings – so about one third of people here don’t have any pension savings, while if you look at the private sector, that is more like two thirds of people aren’t saving today,” he said.
While some people have been forced to delay their pension plans due to the rising cost of living, Mr Flanagan stressed the importance of having a pension when it comes to long-term financial health.
“I would encourage people to start saving, even if it is only a very small amount initially and build that up as it becomes more affordable over time, create that savings habit,” he suggested.
Mr Flanagan said the Government’s plan around auto-enrollment does exactly that.
“It plans to capture more people into the savings net and gradually build the amount people will save,” he said.
Overall, the study reveals that Irish pension savings levels are significantly behind the global average.
Ireland ranks around 14th of the 22 countries assessed in the report.
“We are the only country in the OECD who doesn’t have an auto-enrollment system, so I think addressing that issue will be central to closing that gap,” Mr Flanagan said.
Marisa Hall, Head of the Thinking Ahead Institute said 2022 was a rough year for those who do have pension investments.
“Last year we experienced, to an extent, a polycrisis where various risks combined, were amplified as a result, and manifested in significant asset falls.
“It is our view that these systemic risks will increase in future and will emanate predominately from environmental, societal and geo-political sources.”
Overall, just seven countries – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – made up 92% of all pension assets in the study.
The US remains the biggest pension market, followed by Japan and Canada.
The study shows that since 2002, overall equity allocations have shrunk from 50% to 42%, while the allocation to bonds has decreased from 38% to 32%.
Allocation to other assets, such as property and other alternatives, has increased from 9% in 2002 to an estimated 23% at the end of 2022.
The report states that traditionally the US and Australia have had higher allocations to equities than the rest of the largest seven pensions markets, while Japan, Netherlands and the UK have had higher allocations to bonds.