The 10 biggest Irish plcs have a combined pension deficit of €3.3 billion, according to new estimates by consultants Mercer.

The estimates for the combined deficit as of December 31st, 2004 are based on information from last year's published financial statements and are measured using the new international accounting standard IAS 19.

The 10 biggest companies, based on market capitalisation, are AIB, Anglo-Irish Bank, Bank of Ireland, CRH, Elan, IAWS, Independent News & Media, Irish Life & Permanent, Kerry, and Ryanair.

Their combined pension scheme deficit has increased dramatically from estimates of €1.9 billion at the start of 2004, according to Mercer.

The estimated €3.3 billion total deficit represents over 5 per cent of the market capitalisation of the top 10 Irish companies.

Mercer said that the dramatic increase in pension scheme deficits could come as a surprise to shareholders considering the better-than-expected performance of pension investment funds in 2004 and the increase in contributions paid by many companies. Managed pension funds enjoyed growth of 10.4 per cent on average in 2004, but this gain was wiped out by falling long bond yields.

Pension scheme liabilities, as measured under the Pensions Board's minimum funding rules for defined-benefit schemes, are linked to long bond yields.

However, these fell from 4.9 per cent at the beginning of 2004 to 4.2 per cent as of January 1st, 2005, and have tumbled further since.

Ms Joyce Brennan, a senior consultant at Mercer, said companies now understood that further falls in bond yields could be a higher risk for pension scheme deficits than the risk posed by underperforming equities.

"Despite this, the majority of pension schemes continue to invest predominantly in equities, which provide no protection against the risk of bond yields falling further," Ms Brennan said.

"This is because most companies need to continue to invest in equities to potentially generate a good return to reduce pension scheme deficits and long-term costs. For some, it's Catch 22."

Pension deficits are set to become significantly more visible following the introduction of IAS 19.

Up until January 1st, pension scheme deficits (or surpluses) have been reported in notes to company accounts, but the deficit must now be recorded on company balance sheets.

Companies that want to avoid significant volatility on their balance sheets are likely to opt for a conservative investment strategy heavily weighted in bonds.

However, by doing so, they may be sacrificing the traditionally higher returns generated by equities.