Ireland’s largest defined benefit schemes still 'under pressure'
Ireland’s biggest defined benefit (DB) pension schemes remain under pressure despite some recent falls in deficits, according to a survey from Lane Clark & Peacock Ireland (LCPI).
The survey found that falling euro corporate bond yields increased pension liabilities over the year to 31 December 2012 to €5.7bn, although LCPI said a recovery in these yields and positive market returns throughout 2013 reduced these deficits substantially, to around €2.8bn as at 30 September 2013.
The survey covers 17 of the largest companies, by market capitalisation, listed on the Irish Stock Exchange and other exchanges, which have DB pension arrangements in Ireland.
It also covers 13 semi-state or state-controlled companies with DB pension schemes.
Figures came from annual accounts and other publicly available information.
The highest deficit – €1.3bn – was recorded by drinks conglomerate Diageo.
The Bank of Ireland had a €1.2bn deficit, and Allied Irish Bank (AIB) €789m.
In aggregate, the companies analysed paid substantial contributions – €1.8bn, up from €1.2bn in 2011 – to their pension schemes in 2012, although €830m of the total was paid by AIB.
However, these companies are coming under pressure from trustees and government to increase contributions further.
During 2012, most companies paid contributions in excess of the cost of benefits accrued, in order to reduce deficits.
AIB and alcoholic drinks manufacturer C&C Group made contributions of more than eight times the cost of benefit accrual.
At 31 December 2012, only one company – Kingspan, a provider of sustainable building products and environmental buildings management – reported funding levels of more than 100% (Kingspan’s was 104%).
On average, however, funding levels for schemes fell during calendar year 2012, from 86% to 82%.
The total pensions liability as a percentage of market capitalisation increased slightly, from 33% at end-2011 to 36% at end-2012.
However, some companies’ liabilities remain higher than their market capitalisation, including packaging company Smurfit Kappa (116%), convenience food manufacturer Greencore (150%) and Bank of Ireland (181%).
But trustees are still employing strategies to reduce risk, such as reducing exposure to equities.
The average equity allocation for those pension schemes analysed fell from a high of 58% in 2010 to 49% in 2012.
But LCPI said this is still significantly higher than pension schemes in other jurisdictions – for example, UK schemes on average hold 36% of their assets in equities.
The consultancy said regulatory demands were putting more pressure than ever before on trustees, such as the introduction of risk reserves, and the reintroduction by the Pensions Board of the deadline for submitting funding proposals.
Conor Daly, partner at LCPI, said this week’s announcement of the government’s intention to change the order of priority of pension beneficiaries opens up the prospect of pensions in payment being reduced in future restructuring plans.
“It is apparent now that being a member of a DB scheme no longer guarantees a pension,” he said.
“While providing some equity for members not yet retired, recent ministerial announcements have opened the worrying prospect of pensions in payment coming under pressure under future restructuring.”
He added: “We foresee many more closures and restructures of these schemes over the next 12 months.”