2015 saw a general improvement in pension scheme funding levels, according to Mercer. Sean O’Donovan, Head of DB Risk, commented “In 2015, many schemes benefited from a rise in interest rates. This rise in rates reduced overall liability values and coupled with the positive asset returns, c5% on average, most schemes finished the year with an improved funding position. However, the first few weeks of 2016 have seen increased market volatility and sponsors and trustees should avoid complacency”.
The beginning of 2015 saw low interest rates drive up schemes’ liability values and made it difficult for trustees to de-risk into traditional matching assets such as high quality government bonds. Over the course of 2015, sponsors welcomed the rise in corporate bond yields that drive their year-end financial disclosures. Overall company Balance Sheet positions should have been healthier at the end of 2015 when compared to 2014. Defined benefit deficits for the ISEQ constituents are estimated to have fallen from €4.6bn to €2.4bn over the course of 2015.
However, the first few weeks of 2016 have seen a fall in all major equity indices driven by uncertainty in China and the impact of lower oil prices on energy stocks. In addition, high quality sovereign bond yields, such as German bunds, have begun to fall creating upward pressure on liability values. Central banks across the globe will be formulating policies to try and address the recent falls through possible easement of monetary policy but continued volatility is likely to be expected.
“Increased volatility is a concern for trustees and sponsors alike. Schemes need to make the most of opportunities as and when they arise and put in place plans to capture funding level improvements”, commented Mr. O’Donovan. He added “trustees and sponsors may wish to consider their exposure to lower bond yields and falling 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”.