Irish pension schemes’ funding plans may come unravelled in the coming months due to spiralling deficits, consultant LCP has warned.
The combined shortfall of Irish defined benefit (DB) pensions ballooned in the first nine months of 2016 to €6.8bn, according to LCP estimates.
Falling corporate bond yields, quantitative easing in Europe and the impact of Brexit caused Ireland’s aggregate shortfall to more than double since the end of 2015.
Equity gains this year and a bond market rally following the US election earlier this month softened the blow but only marginally.
Conor Daly, partner at LCP, said: “These rises bring challenges, both for the companies themselves and the members … many companies have committed to funding proposals that have been approved by the Pensions Authority.
“Market conditions could result in those going off track by year-end 2016 and may require re-negotiation with pension scheme trustees and approval by the Pensions Authority for 2017.”
In July, less than a month after the UK voted to leave the European Union, the Bank of Ireland pension fund reported a €460m increase in its deficit.
The sudden spike in shortfalls – which for some pensions reached record highs – could hurt dividend payouts and force financial services companies to hold higher regulatory capital, Daly added.
Pension funds that avoided wind-up during the 2008 financial crisis might soon come under renewed pressure as the cost of sponsor contributions mounts.
In addition, members will “undoubtedly have to take some of the pain”, Daly said, including potential benefit cuts or scheme closures.
In its report, LCP said the volatile nature of Irish deficits showed that many companies had yet to implement effective de-risking programmes.
LCP analysed the balance sheets of 26 Irish public and state-owned companies with “significant” DB assets to determine the impact of contributions and deficits on sponsor covenant.
The consultant found that, last year – a period in which deficits substantially reduced – sponsors contributed on average more than double the amount necessary to cover benefit accruals in an effort to plug shortfalls.
Two companies, C&C Group and DCC, contributed more than 10 times benefit accrual.
The 26 firms contributed an aggregate €1.16bn to their pensions during 2015.
At the end of 2015, only one sponsor – building materials company Kingspan Group – had a surplus in its pension fund.
Across the channel in the UK, research by Hymans Robertson indicated that market movements in the wake of the US presidential election helped reduce the UK’s aggregate DB deficit.
The consultant estimated a reduction of £35bn (€40.7bn) to bring the shortfall to £825bn as of November 15.
Calum Cooper, partner at Hymans Robertson, said: “If the experience of the past year, and particularly the past six months, teaches us anything, it’s that deficits can be extremely volatile.
“But these huge gyrations in headline funding figures should not knock schemes off course. A long-term focus needs to be maintained through short-term political fog and uncertainty.”