Ireland’s largest companies’ combined pension deficit has swelled by 160 per cent in the first nine months of the year as bond yields plummeted on the back of central bank actions to shore up the economy and the fallout from Brexit.
The pension gap of 26 publicly-listed and State-owned companies is estimated to have widened to €6.8 billion in September from €2.6 billion in December, according to pensions and investments advisory firm LCP Ireland in a report published today.
"There has been a marked, dramatic deterioration in the funding position of defined benefit plans this year," said Conor Daly, a partner with LCP. "There is a worry that those defined benefit schemes that survived the financial crisis may now come under threat. Companies may look at options ranging from cutting benefits to going for the nuclear one of winding up of pension plans."
The groups surveyed made €1.16 billion in contributions to pension plans during 2015 and are expected to inject a similar amount this year, according to Mr Daly. However, the liabilities of schemes have been hit as yields – or market interest rates – on European corporate bonds dropped to record lows during the summer, while those of similar US securities fell to levels not seen in six decades.
Yields attached to euro zone bonds have been dragged down as the European Central Bank expanded the scope of its government bond-buying programme in March and began to buy up companies' debt in June. Yields across bonds globally have rebounded somewhat since Donald Trump won the US presidential election last week, amid expectations that his $550 billion planned infrastructure spending programme will stoke inflation and interest rate hikes.
The end of the long bond run
“However, the falls over the course of 2016 have been so dramatic the movement in the past week has only had a minor impact [on pensions],” said Mr Daly. “And while some commentators are saying we’re reaching the end of the long bond run, the markets remain jittery as nobody is clear about what Trump is going to do office . . . ”
On the assets side, Irish pension funds are typically more prone to volatility than elsewhere, given that that average plan was 43 per cent invested in equities in 2015, albeit down from 46 per cent in 2014. By contrast, defined benefit pension schemes operated by FTSE 100 companies in the UK now hold just 28 per cent of their equities in assets.
“While the prevailing low bond yields are no doubt a contributory factor in the reluctance to switch from equities to bonds, it would be most regrettable if trustees continue to feel obliged to take undue risks with equity exposure to seek outperformance in order to deliver members’ benefits,” the LCP report said.
Grafton Group had the highest equities exposure among Irish companies' pension pots in 2015, at 70 per cent, according to LCP, followed by Kerry Group, at 64 per cent. AIB had 25 per cent exposure and Bank of Ireland 27 per cent. Investors in banks have reason to be wary of large pension deficits, as they eat into lenders' all-important capital reserves.
Bank of Ireland revealed last month its pension deficit almost doubled to €1.45 billion in the first nine months of the year. Analysts say this has cast doubt on chief executive Richie Boucher’s plans to return to paying a dividend early next year for the first time since 2008. The pension shortfall at State-owned AIB, which is being prepared for flotation as early as next year, widened to €680 million in June from €146 million in December and is likely to have swelled further in the third quarter.
