An estimated €1 billion has been wiped off the value of Irish pension funds due to the tumbling share prices of two of the largest companies on the Irish stock exchange. The combined 2 per cent drop in overall fund performance this week proves that trustees are taking a high level of stock specific risk by having such a high weighting in Irish equities, Mercer employee benefits consultants have said.

At the beginning of this year, the typical Irish pension fund held 2.5 to 3 per cent of its portfolio in Elan and the same amount in AIB.

This reflects the fact that the average overall weighting in Irish equities is 18 per cent and the Irish market is dominated by a handful of large stocks. The five biggest stocks on the Dublin exchange make up 60 to 70 per cent of the index.

"This problem has been spoken about in theory for some time but no one really recognises risks until they occur," said Mercers' Mr Tom Murphy said.

The pensions consultancy puts the optimum Irish equity weighting at 5 per cent or less. "Some trustees are leaving it up to the fund managers to manage the weighting down over the long term but others have taken a more active role". Mr Murphy said the this week's events would not result in funds becoming financially insecure but a real reminder to trustees that they needed to look at risk as well as return.

The chairman of the Irish Association of Pension Funds, Mr John Feely, said the loss had to be taken in context. "In money terms it is significant but in percentage terms it's not a disaster. Irish pension funds have been reducing their exposure to Irish equities steadily over the past 10 years."

Mr Feely does not expect a knee-jerk reaction to a short-term event like this as fundamental long-term investment principals had not changed. "You won't see a flood of pension fund money in any direction in response to this," he said.