A strong surge by global equities this year helped wiped out a total €1 billion deficit that existed across defined benefit (DB) schemes of Irish publicly quoted companies at the start of last January, according to new figures from Mercer, the human resources consulting firm.
The last time aggregate Iseq pension schemes were in balance would have been before the 2008 financial crash, Peter Gray, corporate consulting leader with Mercer, estimates.
A 22 per cent rise by global equities so far this year and a rise in corporate bond market interest rates – or yields – have combined to deliver a “perfect scenario” for defined benefit pensions (DB), according to Mercer.
Corporate bond yields, used as a reference to value the liabilities of pension schemes, rose over the course of 2021 as financial markets began to price in expected interest rate hikes over the medium term. This came as the spectre of inflation emerged amid a reopening of economies following the worst of Covid-19 restrictions.
Overall, Mercer estimates that the cumulative DB balance sheet deficits for Iseq-listed companies could be close to zero at the end of 2021, it said.
“A near perfect scenario of higher yields and strong asset performance will have had a positive impact on DB pension scheme funding levels,” said Mr Gray. “The only headwind has been the rise in inflation expectations, which will have increased pension scheme liabilities insofar as the benefits are linked to inflation.”
Final salaries
Dublin-listed companies, from building materials giant CRH to ferries operator Irish Continental Group (ICG) have a total of €28 billion of DB scheme assets, where retiree entitlements are linked to individuals' final salaries, even as the market has moved en masse in recent decades towards defined contribution (DC) plans, tied to the performance of employer and employee investments.
Even where DB schemes remain, many have been closed to future accrual of benefits in order to reduce financial risks for companies.
While only 25 per cent of DB scheme assets are held in equity funds, according to Pensions Authority annual statistics, another 25 per cent are held in other growth assets. These will also have increased in value over 2021, according to Mercer.
The value of bonds held by pension schemes – which move inversely to bond rates – have fallen as bond yields rose, but not enough to outweigh the gains in riskier asset classes, it said.
However, Mr Gray said that companies and pension trustees need to be wary of the potential for future market volatility.
“They may consider using the recent improvements in funding levels to de-risk or diversify their investment strategies,” he said, highlighting that new EU pension regulations transposed into Irish law this year have increased the oversight burden on pension trustees.
“The management of both DB and DC pension schemes is more onerous than ever and the burden is only likely to increase,” he said.
