Rising interest rates are proving a boon for traditional company pension schemes.
The higher interest being paid on corporate bonds means Irish defined benefit pensions schemes could swing into a surplus of €1bn after years of recording deficits.
The pension schemes at Irish Stock Exchange-listed companies have fared well during the first half of 2022 despite significant falls in global equity markets, according to an analysis by Mercer.
The pension consultants estimate that the cumulative balance sheet position for defined benefit schemes of Iseq companies could be a surplus of over €1bn at the end of June 2022.
This is mainly down to the fact that corporate bond yields increased by around 2 percentage points in the year to day
This has resulted in company balance sheet liabilities decreasing by between 25pc and 30pc.
And the gain is despite global equity markets being down by around 20pc over the first six months of the year.
Defined benefit schemes are ones where employees are promised a set pension based on their years of service and final salary.
Liabilities in these schemes are measured in relation to bond yields.
The rise in bond yields has boosted defined benefit schemes, as it has meant the liabilities have fallen.
However, the news is not so food for those with defined contribution schemes.
These are pension plans where what you get when you retire depends on how much you have saved, how the investment has performed and the length of time the funds have been invested.
After a long period of positive returns, most defined contribution pension schemes will have fallen in the last six months, Mercer said.
This is due to the fact that stock markets have fallen in the last few months.
However, this is coming on the back of a long period of positive investment returns and most diversified investment funds will still have overall positive returns over recent years.
The assets of defined benefit schemes at Iseq companies have fallen too.
But the fall in liabilities has outweighed the negative returns on pension scheme assets.
A surplus of €1bn for the pension schemes of Irish stock market listed companies contracts with a deficit of €4.5bn in December 2016.
Corporate pensions accounting leader with Mercer Christopher Delaney said: “If the current conditions persist to year-end, the position of DB pension schemes on company balance sheets will have moved into a meaningful surplus for the first time in many years.”
He said the fall in liability values brought about by large increases in bond yields has more than offset the rise in inflation expectations and the significant negative returns from equities and other higher volatility growth assets.
For the minority of companies with an open DB scheme, the annual cost of providing a DB pension to employees may reduce significantly.
“However, the cash contributions that companies are required to pay into their schemes will not automatically reflect the improvements in funding levels, as these contribution rates are typically calculated every three years.”
Mr Delaney said contribution rates agreed during the last year to 18 months are unlikely to take account of the recent improvement in funding levels.
He said companies impacted by this may wish to engage with the trustees of their pension schemes to explore whether their contribution rates can be revised to take account of recent changes.