The combined pension deficit at Irish publicly-quoted companies swelled by about 50 per cent over the course of 2016 as bond yields slid, new figures show.
Human resources consulting giant Mercer estimates that the total pension deficit of members of the Iseq index jumped to €4.5 billion from €3 billion over the course of the year.
“Discount rates, used by companies to value their pension schemes which are based on corporate bond yields, fell by approximately 0.75 [percentage points] for the average scheme, increasing liabilities by 16 per cent,” Mercer said.
“This has not been matched by returns on schemes’ assets, which have generally ranged between 8 per cent and 10 per cent.”
Bond prices fell as a result of the actions taken by central banks to shore up the world’s economy. However, pension shortfalls for 2016 would have been much worse had bond yields not rallied in the final three months of the year, with Donald Trump’s election as US president in early November serving to boost expectations for inflation and interest rate hikes in the world’s largest economy.
Inflation expectations
For example, analysts at Davy in Dublin estimate that Bank of Ireland’s pension deficit, which doubled over the course of the first nine months of the year to €1.45 billion, fell back below €1.2 billion by the end of the year.
"The recent rise in inflation expectations could provide a chink of light for 2017 and beyond," Mercer said. "Signs that inflation is expected to return may encourage the European Central Bank to end or reduce its bond-buying programme, which is designed to stimulate inflation within the euro zone."
The ECB signalled in early December that while it was extending its quantitative easing programme by nine months to the end of 2017, its monthly sovereign and company purchases will fall to €60 billion from €80 billion. The scheme, which started in March 2015, will have cost €2.3 billion by the end of this year.
Protect schemes
Peter Gray, a risk financing specialist at Mercer, said that companies and pension trustees should take advantage of an expected improvement in pension plans to protect schemes against the threat of future volatility.
These may include “non-traditional measures such as equity downside protection, interest rate and inflation hedging,” he said.
On the assets side, Irish pension funds are typically more prone to volatility than elsewhere, given that that average plan was 43 per cent invested in equities in 2015, albeit down from 46 per cent in 2014, according to pensions and investments advisory firm LCP Ireland.
By contrast, defined benefit pension schemes operated by FTSE 100 companies in the UK now hold just 28 per cent of their equities in assets.
