Investment considerations for Irish defined contribution schemes
Key investment considerations for trustees and sponsors for Irish defined contribution (DC) schemes
As Irish DC schemes continue to grow in scale and importance, trustees and sponsors must balance delivering strong, cost-effective investment outcomes while protecting members from market, longevity and inflation risks.
For Irish DC investors, this means portfolios must be resilient to a wider range of shocks, from political crises to trade disruptions, while remaining positioned to capture emerging opportunities in a fragmented world. Trustees and sponsors must navigate a more complex and volatile environment than ever before to safeguard members' retirement outcomes in an uncertain world.
We believe looking at these top five key investment areas will be beneficial in helping to safeguard member outcomes going forward:
- Fire drill and scenario analysis
- Concentration risk
- Current risk and hedging review
- Adding to diversification
- Member communication and outlier analysis
Top investment considerations for trustees and sponsors of Irish defined contribution schemes
Read our paper where we explore in more detail the key investment considerations to consider to help navigate today’s complex landscape.
Summary of key investment considerations for trustees and sponsors
Defined contribution trustees and sponsors must navigate a more complex and volatile landscape than ever before. We believe looking at these five key areas will be beneficial in safeguarding member outcomes going forward.
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Fire Drills and Scenario Analysis:Trustees and sponsors should regularly conduct simulated crisis scenarios to evaluate how their portfolios perform under extreme but plausible market events. This proactive approach enables the identification of potential vulnerabilities, supports informed decision-making during periods of market stress, and enhances overall confidence in the investment strategy.
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Concentration Risk:Trustees and sponsors should be aware of the increasing concentration within equity indices, particularly in sectors such as artificial intelligence and technology. It is essential to quantify these sector concentrations and evaluate whether they align with the scheme’s risk appetite and the best interests of members. Unintended sector exposures can amplify portfolio risk and undermine diversification benefits, potentially impacting long-term investment outcomes.
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Currency Risk and Hedging Review:Trustees and sponsors should carefully assess the significant exposure to US Dollar assets within most defined contribution portfolios. The dollar has tended to perform well both in strong and weak global growth environments which was a positive for Irish investors. However this dynamic changing with the dollar’s behaviour becoming less predictable. Given these evolving dynamics, it is essential to review existing currency hedging strategies to ensure they remain effective in mitigating currency risk. Trustees should consider increasing currency hedging or adopting dynamic hedging approaches where appropriate, aligning these strategies with the scheme’s risk appetite and investment objectives to better protect members’ retirement outcomes.
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Adding to Diversification:Consider allocating a portion of the portfolio to liquid alternative investment strategies. These strategies, including hedge funds, typically exhibit low correlation with traditional equity and bond markets, offering valuable diversification benefits. In the current environment of heightened geopolitical tensions, market volatility, rising interest rates, and macroeconomic divergence, liquid alternatives can play a critical role in enhancing portfolio resilience and managing risk effectively. Trustees and sponsors should evaluate the suitability of these strategies within their overall investment framework to support long-term member outcomes.
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Member Communication and Outlier Analysis:Trustees should proactively identify members whose investment allocations may not align with their risk tolerance or retirement horizon. For example, members nearing retirement who remain fully invested in equities represent a potential risk. Implementing tailored communication and educational initiatives is essential to help these members understand the associated risks and encourage appropriate adjustments to their investment profiles.
The transition to a multi-polar world presents a complex and evolving investment landscape for Irish DC schemes. Trustees and sponsors must adopt a forward-looking, resilient approach that balances risk mitigation with opportunity capture. By deepening their understanding of geopolitical risks, reassessing currency exposures, embracing diversification through liquid alternatives, and enhancing member engagement, DC schemes can better safeguard members’ retirement outcomes.
Regulatory Information
Mercer (Ireland) Limited, trading as Mercer, is regulated by the Central Bank of Ireland.
Please see our important notices for other regulatory information.
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