The pensions "hole" at Ireland's largest companies has almost doubled in the first seven months of the year, new figures show.
Volatile markets mean companies have found it difficult to make money on their pension investments.
At the same time, historically low and even negative bond yields have increased the scale of liabilities in defined-benefit, or final salary, pension schemes.
Mercer, which tracks the pension position of Ireland's largest listed companies – members of the Iseq 20 – says the gap has widened dramatically this year.
“We saw some easing of the situation towards the end of last year but, since then, it has tumbled and it now looks as though interest rates and bond yields will be lower for longer than we might have anticipated,” said Séan O’Donovan, head of defined-benefit risk at Mercer Ireland.
At the start of the year, there was a deficit of just under €3 billion in the pension schemes of these large Iseq-20 companies – a group that includes CRH, Ryanair, Kerry Group, Paddy Power Betfair and Bank of Ireland. By the end of July, this had jumped by 97 per cent to €5.7 billion.
Record high
The figures emerged on the day Mercer’s UK business reported the pension deficit of Britain’s 350 largest companies hit a record high earlier this month.
The deficit in the UK companies’ funds jumped by £10 billion (€11.7 billion) to £149 billion in just five days, after the Bank of England cut interest rates to 0.25 per cent at the end of last month. According to the company’s UK Pensions Risk Survey, the pension liabilities of the FTSE-350 firms on August 4th was a record £856 billion.
“The aftermath of the vote for Brexit is still having a significant impact,” Le Roy van Zyl, a senior consultant in Mercer’s financial strategy group, said. “The Bank of England’s actions should help to support economic activity, but whether the economy is going into recession is still unclear. This will of course have an effect on pension scheme finances and the health of sponsors . . .”
ECB damage
While Brexit was less of an influence on the Irish figures so far, according to Mr O’Donovan, efforts by the European Central Bank to kick-start the euro zone economy have been a major factor in the worsening position of defined-benefit funds, which guarantee to pay workers a pension in retirement based on their final salary and the number of years they have worked for their employer.
“Quantitative easing has been in the euro zone, which is the market that drives our liabilities, for quite some time.”
The recent extension of the programme, allowing the ECB to purchase corporate bonds, has only exacerbated the situation.
“The expectation in many quarters has been that interest rates will eventually rise again, easing the position of pension funds,” said Mr O’Donovan. “It is far from certain if and when that will happen.”
He said companies were keen to “de-risk” their pension schemes but the cost is “unappetising and unaffordable”.
Imposing short-term fixes to erase near-record deficits could put people's jobs at risk, Mercer says, adding that companies and their pension scheme trustees are looking at collaborative approaches to address the problems.
