The average funding level of defined benefit (DB) pension schemes’ in Ireland has increased to 108% in 2022.
An analysis by LCP Ireland compiled data from 13 of the largest listed companies and 12 semi-state or state-controlled companies’ DB pension schemes in Ireland.
It found that in 2022 pension funds’ funding levels increased to 108% from 96% in 2021. This is the first time in the 15 years of the LCP accounting survey that the average funding level has been above 100%.
LCP attributed the rise in funding levels to an increase in bond yields throughout 2021, which lowered liabilities. Strong equity performance and contributions from sponsoring companies also played a significant role in this enhancement, it said.
Overall total contributions decreased slightly from €700m in 2021 to €600m in 2022. This decrease, according to LCP, is representative of improved scheme funding positions.
In addition, LCP said that inflation and lingering expectations of recessions may have meant that companies prioritised other areas of their business.
LCP analysis of accounting disclosures also revealed that a majority of companies make contributions that exceed the cost of benefit accrual under IAS19.
It said that on average, companies contributed more than 1.3 times the cost of benefit accrual according to the accounting standards.
LCP said that while it expects this ratio to decrease further as discount rates rise it is still a notable decrease from 3.1 times in 2021.
It also expects this level of contribution compared to the cost of benefit accruals to continue to fall over 2023 as deficit contributions continue to fall away.
Conor Daly, partner at LCP, said: “Funding levels improved significantly over 2022, a trend that was maintained into 2023. This was principally due to a very sharp rise in bond yields.”
He said that if they have not already done so corporates should be engaging with trustees about how they can lock down these gains and ensure their schemes are more robust against market shocks.
The implementation of the Institutions for Occupational Retirement Provision II directive saw a range of enhanced governance requirements imposed on Irish pension schemes and The Pensions Authority has demonstrated its determination to ensure full compliance by the Irish pensions sector.
LCP said the publication of supplementary guidance on new requirements such as Own Risk Assessments to accompany the existing ‘Code of Practice’ has provided some welcome clarity to the requirements.
But it expects that Q1 2024 will be a busy time for pension schemes as they look to complete Own Risk Assessments and Critical Reviews before the regulator’s deadlines.
Martin Haugh, partner at LCP, said: “The increasing cost of ensuring that defined benefits pension schemes comply with IORPII and regulatory requirements will mean that employers may reconsider their support for legacy pension arrangements and wind up may increasingly be an option.”
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