Wednesday 21 November 2018

Pension schemes see black holes balloon despite €10bn 'bailout'

Stock image
Stock image
Charlie Weston

Charlie Weston

The majority of private pension schemes have significant deficits despite employees and companies pumping in almost €10bn within the past six years.

The black hole in the pension pots of the State's large private companies and semi-states has shot up by €1bn this year alone.

This has sparked fears more pension schemes will be forced to close or restructure - or employees will face largely reduced pensions and have to work much longer before they can retire.

Traditional defined-benefit pension schemes are becoming impossible to fund even with reduced benefits and a €10bn bailout, according to a damning new report.

The widening funding gap is despite a number of companies attempting to plug the holes by lowering pension benefits and trying to get employees to transfer out of schemes.

There is now a shortfall of €3.6bn across 26 of the schemes of the biggest employers. These are some of the largest companies in the State, employing thousands, prompting fears more schemes will close.

Just three companies are fully funded. These are construction materials producer Kingspan, investment conglomerate DCC and AIB Bank.

The largest deficit is in drinks giant Diageo at €1.1bn, followed by CIÉ at €730m, and Bank of Ireland at €446m. Some of the lowest funding levels are in the Central Bank and forestry body Coillte.

The poor out-turn is despite surging stock markets, according to an analysis by pension advisers Lane Clarke & Peacock Ireland.

Low bond yields mean pension funds have seen deficits balloon. This is a direct result of the low-interest rate environment.

The new analysis shows the deficits in the biggest pension schemes in the private sector shot up by €1bn this year, even though an extra €1.1bn was put into them by sponsoring companies.

The analysis looks at traditional defined-benefit pension schemes. These are where people get a set level of pension based on their years of service. Those with a full 40 years of service get two-thirds of their final salary. But these schemes have become highly problematic to fund due to people living longer and because of low bond yields.

Deficits have remained stubbornly high since the economic crash, the new report found.

The schemes examined have only got an average of 85pc of funding they need to pay out the pensions commitments made to workers.

Partner at Lane Clarke & Peacock Conor Daly said that over the past five or six years, average funding levels had hovered around 85pc despite company contributions of almost €10bn since 2010, and stock markets hitting new highs.

"The main reason for funding levels remaining stubbornly low has been the sharp and prolonged fall in eurozone bond yields," the pensions expert said.

He said pension scheme liabilities are valued by reference to bond yields so when bond yields fall, the value of liabilities rise.

The most recent information from the Pensions Authority shows there has been a sharp fall in the number of defined benefit scheme. There were around 1,200 schemes before the economic crash.

But by the end of last year there were 653 schemes. Some 25 of those were in the process of winding up, while 181 are frozen.

There is now a shortfall of €3.6bn across 26 of the schemes of the biggest employers.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business