- Defined benefit pension liabilities in Ireland increased by c.10% in 2019 as a result lower yields
- Deficits for ISEQ constituents remained steady at c.€1.2bn due to strong asset performance across all major classes
- The cost of funding DB schemes has increased as a result of lower yields
According to Mercer analysis, 2019 saw company accounting liabilities for defined benefit (“DB”) schemes in Ireland increase significantly due to falling yields. At the end of August, yields reached their lowest-ever level, driving pension scheme liabilities up c.20% compared with the start of the year. However, from August onwards, yields rallied, causing pension scheme liabilities to fall back again and finish the year c.10% higher than their starting level.
Ordinarily this would spell bad news for companies and trustees alike, but Mercer noted that the increase in liabilities was offset by strong asset performance across all major asset classes. The MSCI World Index of equities was up c.31% ($ terms) over 2019 and major bond indices were up c.16%. Such returns are notable given the uncertainty experienced as a result of global trade wars and Brexit during 2019. The overall result is that these strong returns have offset the rise in liabilities, leaving DB funding levels similar to those at end 2018.
According to Mercer, members of defined contribution (“DC”) schemes have benefited from these strong returns, seeing the value of their DC savings increase over 2019. However, for those expecting to purchase a pension, the fall in yields mean the cost of doing so will have increased.
Peter Gray, Corporate Consulting Leader and Principal, Mercer Ireland, commented, “2019 has been an interesting year. Falling yields had the potential to cause a very difficult year for scheme sponsors and trustees. However, strong asset performance has effectively cancelled out the impact of increasing pension liabilities. 2019 could have looked very different had it not been for the strong performance in equity markets for schemes that were not well matched. I would encourage sponsors and trustees to consider whether their schemes are exposed if there were to be a correction in the equity markets over 2020. While deficits have remained stable the cost of funding DB schemes will have increased due to lower yields”
The industry continues to wait for regulation and guidance to bring the European pensions directive, IORP II, into Irish statute (the deadline was 13th January 2019). IORP II will require all DB & DC schemes to implement formal risk management structures and will lead to additional governance, member communication and disclosure requirements and ultimately increase the cost of operating a pension scheme. Under the new European pensions directive, Trustees will be required to establish and document robust risk management frameworks. The Pensions Authority will review and challenge trustees on their governance structures and decision making process.
“With some 10,000 pension schemes in Ireland, it is perhaps inevitable that a more onerous and expensive governance framework will cause a reduction in the number of schemes. This is likely to particularly impact DC schemes, through a combination of consolidation and increased popularity of Master Trusts. The introduction of auto-enrolment also has the potential to cause disruption in the industry when this is introduced. Companies should consider the impact of these changes on their pension arrangements and ensure they remain fit for purpose” commented Mr. Gray.
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 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.
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