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Falling interest rates hit pension fund liabilities

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(Stock photo)

(Stock photo)

Getty Images/iStockphoto

(Stock photo)

Falling interest rates have pushed up the costs attributed to company pension funds to meet their obligations.

However, the increase in the accounting liabilities for defined benefit pensions was offset by a strong rise in the value of assets last year.

Falling yields were a real problem in the first half of last year, according to advisers Mercer.

They fell so far that they hit their lowest-ever level.

This pushed the liabilities of defined benefit schemes up by 20pc compared with the start of the year, Mercer said.

However, from August on, yields rallied, which caused the liabilities of the schemes to fall back.

The liabilities, or the cost of funding schemes, finished the year 10pc higher than at the start of last year.

Defined benefit schemes promise to pay a set level of pension based on final salary and length of service.

Trustees of these schemes were boosted by strong asset performances last year.

The MSCI World Index of equities was up around 31pc last year and major bond indices were up 16pc.

Corporate consulting leader and principal at Mercer Ireland Peter Gray said returns like this were notable given the uncertainty experienced as a result of global trade wars and Brexit during 2019.

The overall result is that these strong returns have offset the rise in liabilities, leaving defined benefit funding levels similar to those at the end of 2018.

People in defined contribution retirement schemes also benefited from these strong returns, as they saw the value of their savings increase during 2019.

The pension from a defined contribution scheme depends on the amount of money invested in it and the performance of the funds.

The other side of the coin of falling yields is that the cost of purchasing a pension at retirement has risen. Mr Gray said: "2019 has been an interesting year. Falling yields had the potential to cause a very difficult year for scheme sponsors and trustees.

"However, strong asset performance has effectively cancelled out the impact of increasing pension liabilities."

He warned sponsors and trustees of defined benefit schemes to consider whether their schemes would be exposed if there was to be a correction in the equity markets over the course of this year.

"While deficits have remained stable, the cost of funding defined benefit schemes will have increased due to lower yields," Mr Gray added.

There are around 10,000 pension schemes in this country.

Irish Independent