Defined benefit pensions in Ireland weather turbulent Q1 markets well but trustees and sponsors face challenges ahead

15 May 2020

Ireland, Dublin

  • Sharp decline in equity markets hit defined benefit (DB) pension scheme assets over Q1
  • Soaring corporate bond yields cause significant reduction in companies balance sheet pension liabilities
  • Overall, DB pension deficits for ISEQ listed companies have remained unchanged at €1.2bn
  • Defined contribution (DC) pension members should avoid making knee-jerk decisions that could lock in losses

Despite the extreme volatility in financial markets caused by the COVID-19 global pandemic, analysis by Mercer shows that DB pension deficits for ISEQ-listed companies have remained unchanged at €1.2bn from year-end to the end of Q1. The impact of the sharp fall in stock markets in Q1 on the asset values of DB pension schemes of ISEQ constituents was offset by a decline in scheme liabilities fueled by soaring corporate bond yields. 


Companies measure DB pension scheme liabilities using discount rates based on the yield of AA-rated corporate bonds, the increase of which has seen discount rates rise by c.40 – 50 basis points. This reflects liquidity constraints, as restricted company cash flow has squeezed bond prices higher. The risk associated with investing in these bonds has also heightened due to fears over issuers’ ability to service the debt.  The increase in bond yields has led to pension scheme liabilities dropping by between c. 6% - 15% in schemes of ISEQ-listed companies. 


Mercer estimates that assets held by pension schemes have fallen by between c. 5% and 15% for most, largely due to a 19% decline in global equity markets over Q1, despite some level of recovery as the markets stabilized towards the end of March. Corporate bonds also fell in value (down c.6%), with only high quality Eurozone government bonds gaining (up by c.3%).


Overall, Mercer estimates that balance sheet deficits for these ISEQ companies have remained unchanged at €1.2bn at the end of Q1.  This will be welcomed by plan sponsors as they try to navigate the challenges posed by the

COVID-19 global pandemic.


Pension fund trustees will focus on a scheme’s ongoing funding level and its ability to satisfy the statutory solvency test, rather than the company’s balance sheet. Funding levels have deteriorated with the exception of schemes heavily invested in high quality sovereign bonds (typically German bonds), which have fared better due to the increase in the value of those assets over Q1.


Mercer advise pension fund trustees and sponsors to scenario plan for the possible economic disruption of a second, or extended, lockdown.  They should also consider the potential investment opportunities that the Q1 declines offer, such as buying assets at more attractive entry points or diversifying out of volatile assets.


Peter Gray, Corporate Consulting Leader with Mercer, commented, “Q1 was unprecedented in the level of market reaction to the global impact of COVID-19. However, DB schemes in Ireland have generally fared well in comparison to the market collapse of 2008 due to higher allocations to high quality sovereign bonds, and increasingly diversified investment strategies.”


“While funding levels have been negatively impacted, most schemes will still meet the regulatory solvency test, with those who do not being required to submit a corrective funding plan to the Pensions Authority.  As with any crisis, there are potential investment opportunities that both companies and trustees may wish to explore relating to hedging inflation risk, accessing corporate bonds at more attractive entry points, and diversifying from volatile listed assets such as listed equities to private equity and purchasing annuities.”


“Over the coming months, as companies get greater clarity on how COVID-19 will impact their business, Mercer recommends that companies engage with their trustees in order to agree funding plans.  Both sponsors and trustees may benefit from scenario planning, including the possibility of a second, or extended, lock down which would cause further economic disruption. It is inevitable that companies will seek to preserve cash, which may lead to consideration of non-cash funding or contingent assets being implemented to provide security to trustees while allowing cash preservation.”


Mr. Gray added: “Since the beginning of the year, members of DC pension schemes will have likely seen the value of their retirement funds fall and we have seen an increased level of queries from members and interest in switching investment strategies.  We would caution against any knee-jerk reactions, especially when the market is so volatile, as it may ultimately only serve to lock in losses.  Those furthest from retirement have time for markets to recover and those closer to retirement will have benefited from de-risking if they have adopted a lifestyle investment approach.  Members are strongly encouraged to seek advice before making any decisions.”


Notes for the Editor

The value of pension scheme liabilities is calculated in different ways depending on the purpose of the calculation. The data included in the Mercer analysis is based on publically disclosed information using the approach that ISEQ listed companies must adopt for their corporate accounts. The data underlying the analysis is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure.


About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @Mercer.