Equity market rally in 2021 wipes out €1bn defined benefit pension deficit for ISEQ listed companies – Mercer

  • Global equity markets up by c. 22% over 2021
  • Corporate bond yields increase by c. 0.2% over 2021, resulting in company balance sheet liabilities decreasing by c. 3%
  • Defined contribution scheme members also benefit from the rise in equity markets
  • Trustees and sponsors need to be prepared for IORP II regulatory scrutiny in 2022
  • Master trust multi-employer arrangements will be a popular option for defined contribution schemes during 2022
Dublin, 20 December 2021

2021 looks likely to close out on a positive for ISEQ-listed companies’ defined benefit (DB) pension schemes despite the continued turmoil caused by the COVID-19 pandemic, according to analysis by Mercer.


The strong performance of global equity markets, which are up c. 22% year to date, has helped to wipe out a €1bn company balance sheet DB pension deficit at the beginning 2021 for ISEQ-listed companies. The stock market rally has increased scheme assets while rising bond yields have reduced scheme liabilities – the perfect scenario for DB pension schemes. Overall, Mercer estimates that the cumulative DB balance sheet deficits for ISEQ-listed companies could be close to zero at the end of 2021.


While only c. 25% of DB scheme assets are held in equity funds, according to Pensions Authority annual statistics, another c. 25% are held in other growth assets. These will also have increased in value over 2021. The value of bonds held by pension schemes will have fallen as bond yields rose but not enough to outweigh the gains in riskier asset classes.


Peter Gray, corporate consulting leader with Mercer, commented, “2021 looks set to be a good year for pension scheme deficits reported on ISEQ company balance sheets. A near perfect scenario of higher yields and strong asset performance will have had a positive impact on DB pension scheme funding levels. The only headwind has been the rise in inflation expectations, which will have increased pension scheme liabilities insofar as the benefits are linked to inflation.”


According to Mr Gray, “Both companies and trustees will be aware of the potential for future volatility and are unlikely to be complacent. They may consider using the recent improvements in funding levels to de-risk or diversify their investment strategies. This is especially likely given the recent introduction of new pension legislation (IORP II) and the pension regulator’s views on appropriate risk levels. Companies may also seek to settle liabilities to remove them from their balance sheet using the improved funding levels to increase pay-outs.”


Pension fund trustees should also have seen improvements in their statutory funding levels in 2021. While these improving funding levels will be welcomed, many will have concerns about increased regulatory scrutiny of trustees’ decisions and the process by which they make them following the implementation of new European pension legislation (IORP II). This will add additional costs to running DB and defined contribution (DC) pension schemes, with some DC schemes likely to transition to multi-employer master trust arrangements.


Mr. Gray noted, “The management of both DB and DC pension schemes is more onerous than ever and the burden is only likely to increase. The requirement for more comprehensive and complex governance and oversight is likely to result in market consolidation, with some DC schemes being transferred to professionally managed master trust arrangements. These types of arrangements take away the burden of responsibility for regulatory compliance and often offer members broader choices in investment options with easier access to relevant information to support their decision-making. Smaller DB schemes are also likely to consider their options as costs increase but the challenges are more complex here, with no comparable consolidation vehicle available for DB schemes.”


Due to the strong performance of global equities in 2021, members of DC schemes will also have experienced rises in the value of their retirement pots.


Mr. Gray noted, “The value of members’ DC pots should have increased over 2021 with most members having exposure to equities through their default investment choice. This is good news, but members should be conscious of their investment time horizon, with those closer to retirement looking to reduce exposure to riskier assets – many default investment options offered by trustees do this automatically. Higher levels of inflation in the future will also impact members’ purchasing power when they retire and members may need to factor this into their investment decisions.”


Notes for the Editor

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 approximately 25,000 employees are based in 43 countries and the firm operates in 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 81,000 colleagues and annual revenue of over $19 billion. Through its market-leading businesses including MarshGuy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit mercer.com. Follow Mercer on LinkedIn and Twitter.