Monday 10 December 2018

Pension deficits of big firms fall by €1.4bn thanks to bond yields

Defined benefit pension deficits for companies listed on the Irish Stock Exchange fell by €1.4bn over last year. Stock image
Defined benefit pension deficits for companies listed on the Irish Stock Exchange fell by €1.4bn over last year. Stock image

Colm Kelpie

Defined benefit pension deficits for companies listed on the Irish Stock Exchange fell by €1.4bn over last year, according to an analysis by Mercer.

This is due to an increase in corporate bond yields, according to the report.

Discount rates, used by companies to value their pension schemes that are based on bond yields, or returns, rose by around 0.2pc for the average scheme, decreasing liabilities by 3pc year on year, Mercer stated.

This, Mercer said, coupled with positive returns on the majority of asset classes, which have generally ranged between 3pc and 5pc, has delivered a positive impact for the health of defined benefit pension schemes in 2017.

"With liabilities in excess of €20bn, even a relatively modest increase in bond yields can have a substantial effect on reported deficits," said Peter Gray, senior consultant with Mercer's Strategic Solutions Group.

"Further adding to the good news from the schemes' perspective is that the rise in yields has not coincided with a rise in inflation expectations, which remain somewhat subdued."

Mercer said corporate bond yields rose sharply over the first two quarters of 2017, reducing the value of defined benefit liabilities.

Although this rise has been somewhat reversed in the following months, year-end discount rates remain above their position at the beginning of the year.

Mercer said that many employers with defined benefit schemes have taken action to reduce their pension risk, with many electing to close their schemes to future accrual of benefits and running risk reduction programmes such as enhanced transfer value (ETV) exercises and bulk purchase annuities.

"Despite the modest rise of interest rates, we remain in a low-yield environment which can make it difficult for trustees to de-risk," Mr Gray added.

"However, as we enter the latter stages of the global economic cycle, significant tail risks on the asset side mean the opportunity costs of inaction may translate into the need for further sponsor contributions."

Irish Independent

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