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Types of Funds

Unless you are lucky enough to have a Defined Benefit/ Final Salary scheme (see Occupational Pensions ) where the value of your pension is guaranteed and the performance is an issue only for your employer, the growth record of the funds where your contributions are invested is what determines the value of your pension.

Past performance is no indicator of the future. However, the stability of the companies sponsoring the selected funds, and the expertise of their managements, are key issues.

If a fund manager has financial strength i.e. a high proportion of free assets over its liabilities, it will have the flexibility to invest more in equities (high returns over the long term) than in fixed interest products (lower returns but lower risks).

Performance is the key and the expertise of your pension adviser is crucial in making informed choices. Pensions are too important to be a discount shopping choice as the Equitable Life policyholders have discovered. In our introduction, we noted that their manta in the Irish market and elsewhere was that resources did not have to be wasted on intermediaries.

In the aftermath of a July 2000 House of Lords judgement that Equitable was liable for a GBP £1.5bn bill to 90,000 customers in respect of policies that had been missold in the 1980's, John Sclater, Equitable's Chairman, publicly apologised for the events which forced the insurer that had been founded in the eighteenth century, to close its doors to new business, cut investment returns to policyholders and put itself on the auction block.

"We are profoundly sorry for what has happened. We deeply regret it. I am conscious it touches the lives of very many people and I could not be more sorry about that," Sclater said.

Index-linked Tracker Funds which are usually the cheapest as they just track chosen market indices and don't require skilled management, are also the safest as the market always rises in the long-term. However that is not the full story. Take for example the ISEQ, the Irish Stock Exchange index in 2006, 10 companies account for about 80 per cent of the total market capitalisation (see the current Market Capitalisation Values ).

We wrote the following in December 2001-Elan Corporation accounts for about 20 per cent of the total. So if Elan fell on hard times, the impact would have a disproportionate influence on the performance of your fund. The same applies to Vodafone in the U.K., which then accounted for about 14 per cent of the FTSE 100 market capitalisation.

Our December warning about overreliance on one stock, was well before the 2002 collapse of Elan's share price in the aftermath of concern about accounting practices, following the disclosure of the fraudulent vehicles for hiding losses, that were used by Enron, the bankrupt U.S. energy trader.

Some people might have considered us alarmist to question the risk of exposure to the then most valued company in Ireland but it usually takes the horse to bolt the stable for the penny to drop. In February2002, Elan's proportion of the Irish market capitalisation, had fallen to below 8 per cent. By early August, it had fallen to less than 1.3% of the market. Elan's percentage was 3.85% in January 2004.

Having recovered in the following 12 months, the share price fell by 70 per cent on February 28, 2005 when Elan had to suspend sales of its multiple sclerosis drug Tysabri.

Individual Pensions Funds Group Pensions Funds can be classified under four headings; Cautious, Measured, Active Aggressive. The importance of the pensions adviser relates to the advice on the mix of funds that you should have in your portfolio.

ARF and AMRF Funds

An ARF (Approved Retirement Fund) and AMRF (Approved Minimum Retirement Fund) are funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund. Your pension fund is the proceeds of Retirement Annuity Contracts as they mature. For a proprietary director, the pension fund will be the value of the pension entitlement.

The choice of investments offered within a fund will vary from one qualifying fund manager to another. They can range from bank accounts to unit linked funds in a specified financial institution or investment body. You are free to withdraw the money invested in an ARF. The capital invested in an AMRF may not be withdrawn until you reach 75. However, income or gains made on your investment in the AMRF may be withdrawn. If you die before reaching 75 the AMRF becomes an ARF and your personal representatives are free to withdraw the money invested in it.

The new options give you more control and flexibility about how your pension fund is used to meet your needs.

Proprietary directors, who are in an occupational pension scheme, are also entitled to the new options.

The new options apply to all Revenue approved contracts made on or after 6 April 1999. If your contract was approved before that date you can avail of these new options with the agreement of your pension provider.

More information is available in the Personal Pension category.

Taxation of Pension Funds

Pension funds are exempt from taxation. Neither income, capital gains, or DIRT taxes are levied on the income nor gains realised from the investment of the assets of these funds.


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