Defined-benefit pension holders facing another hike in contributions
Published 26/08/2010 | 05:00
WORKERS paying into embattled defined-benefit pension schemes could be facing another hike in contributions as plunging European bond yields threaten a fresh pensions crisis.
Experts have warned that the liabilities of defined benefit schemes may have shot up as much as 15pc since the start of the year as a direct consequence of chaotic government bond markets.
The situation is particularly precarious as schemes grapple to resolve their sizable deficits ahead of a major Pensions Board deadline at the end of November.
"It's a significant issue that's making what's already a difficult situation even more difficult," said Noel Collins, of pensions consultants Mercer, noting the "unhelpfulness" of recent bond market developments.
European bond yields determine the cost of the annuities pension schemes must ultimately provide for their members, so movements in the yields feed directly into a core measure of pension scheme liabilities.
"A general rule of thumb is that every 1pc fall in yields pushes up liabilities by 10pc, but it could be higher in some cases," said Fiona Daly of Rubicon Investment Consulting.
Irish pension schemes typically use yields from long-dated French and German bonds to measure the cost of funding their retirees.
Since January, yields on the long-dated German bonds have fallen by about 120bps, while yields on French government bonds are down by about 100bps.
"A fall of 100bps could increase a scheme's liabilities by 10pc to 15pc depending on the age profile of members," said Keith Burns, pensions chairman of the Society of Actuaries, which draws up the rules for valuing pension schemes.
While the equity market crash of 2008/9 prompted plcs to report eye-watering deficits, the latest crisis won't be as evident in the dispatches from corporate Ireland but will be felt keenly by scheme members.
Mr Burns said government bond yields impact on the "funding standard liabilities" of pension schemes, and not on the "accounting standards" where liabilities are pegged to corporate bonds.
"The funding standard is the trustees' main concern," he stressed. "They need to ensure there is enough cash available to meet members' benefits.
"For most schemes at the moment the funding standard drives the cash cost of the plan."
While pension schemes are being hammered by falls in German and French bond yields, frustration is growing about the industry's inability to take greater advantage of rising Irish bond yields.
"The rise in Irish yields should be good, but the view now is that pensions need to invest in more stable funds even though they could be getting 5pc plus for Irish government bonds," said Aidan McLoughlin of the Independent Trustee Company.