Surge in equity markets helped keep DB pension deficits steady at €1bn in 2020


2 March 2021

  • Global equity markets up by c.12% over 2020, despite significant falls in March
  • Corporate bond yields fell by c. 0.3% over 2020, resulting in company balance sheet liabilities increasing by c.5%
  • Defined contribution members have benefited from the rise in equity and bond values

Irish defined benefit (DB) pension scheme deficits ended 2020 at similar levels to 2019 despite a year of turmoil caused by the COVID 19 pandemic, according to analysis by Mercer. Strong market performances resulted in an increase in pension scheme assets, with global equity markets up c.12% and Eurozone government bonds rising c.5%. This, in turn, was offset by the increase in pension scheme liabilities resulting from falls in corporate bond yields. 


Although deficits remain largely unchanged over 2020, this does not tell the full story. Pension scheme liabilities increased significantly over Q1 2020 due to falling corporate bond yields before panic in the corporate bond market saw yields spike by c.100 bps during March. While this spike in yields reduced pension scheme liabilities, equity markets simultaneously fell dramatically – down c.13% in March - resulting in an overall deterioration in funding levels.  The remainder of the year, however, saw COVID 19 related fears allay as huge stimulus packages were announced by major governments across the globe.  As a result, deficits at the end of 2020 remained in line with the beginning of the year.


Overall, Mercer estimates that the cumulative DB balance sheet deficits for ISEQ listed companies was c.€1bn at the end of 2020.


Peter Gray, Corporate Consulting Leader, Mercer, commented, “2020 has been an exceptional year, but pension deficits on company balance sheets have weathered the storm.  That said, the experience in March demonstrates the volatility inherent in defined benefit schemes.  Companies will be cognisant of this volatility and are likely to try and reduce their exposure over time by de-risking and investing in liability matching assets. The challenge is that these assets are currently very expensive, offering limited or indeed negative net returns.  As a result, companies may seek to settle liabilities to remove them from their balance sheet.”


Pension fund trustees are primarily concerned about their scheme’s ongoing funding level and ability to satisfy the statutory solvency test, rather than the pension deficit on the company’s balance sheet. Funding reviews carried out in 2021 are likely to see funding costs increase on top of anticipated increases in running costs due to the implementation of new European pension legislation (IORPII).


Mr. Gray noted: “The persistent fall in bond yields over the past number of years means that many pension schemes that have funding reviews in 2021 will experience increased funding pressures as bond yields are 1% – 1.5% lower than 3 years ago. Falling yields could increase pension scheme liabilities by 10% - 30% depending on scheme maturity. These funding pressures are especially unwelcome as companies seek to conserve cash to help withstand the impact of the pandemic. Employers are likely to seek solutions to mitigate funding increases, for example, by slowing the pace of de-risking or extending the period over which deficits are funded.”


Members of defined contribution (DC) schemes have seen increases in the value of their retirement pots due to the strong performance of global equites. 2020 illustrated the difficulty in trying to time market events and the benefit of not making knee-jerk decisions. The fall in equity markets in March was swift and unforeseen and so too was the rapid recovery in market values driven by policy decisions. Those members who held fast through this period will generally have fared better than those who sold after markets fell and potentially missed the market rally. 


2021 has begun with significant volatility in individual stocks, evidenced by the well-publicised “short squeeze” on GameStop shares and other stocks, but pension fund accounts are long-term investment vehicles that should benefit from diversification and long-term planning. Members who are many years from retirement are able to take a longer-term view when deciding on an investment allocation. Those closer to retirement will generally need to be more cautious in their investment outlook. 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


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