The combination of falling stock markets and interest rates has caused Irish defined benefit (DB) pension scheme funding levels to deteriorate significantly in the first quarter of 2016 according to Mercer. Global equity market indices fell c. 5% over the period. Markets recovered somewhat in March but were unable to make up for the downturn suffered in the first two months of the year. Bond yields fell during the first quarter causing discount rates to fall and put upward pressure on pension scheme liabilities.
Sean O’Donovan, Head of DB Risk, Mercer commented “The gains that Irish DB schemes made over 2015 are likely to have been wiped over the first quarter of 2016 due to falls in all the major equity indices and the subsequent fall in high quality sovereign bond yields, such as German bunds”.
The European Central Bank has announced the continuation of quantitative easing (QE), with an expansion of corporate bonds now eligible to be purchased. Only time will tell if this will be successful in stimulating growth in the Eurozone. In the short term, the inclusion of corporate bonds in QE is likely to push down corporate bond yields which will put more pressure on DB pension schemes.
Mr O’Donovan commented “Interest rate risk and market risk continue to be the largest drivers of the overall level of risk within DB pension schemes. Schemes need to ensure they have an adequate amount of protection in place to help deal with the volatile nature of markets. The introduction of the requirement to meet the Funding Standard Reserve from 1 January 2016 has brought this further into focus.”
He added “Trustees and sponsors may wish to consider their exposure to bonds and equity markets in order to formulate their strategy to reduce inherent risk in their funding policy. More trustees are considering non-traditional protection such as equity downside protection and those trustees with strategies in place will have benefited in the last few weeks.”