€8bn boost for pension funds

PENSION FUNDS have received a fillip of between €8 billion and €10 billion following two months of rising stock markets and favourable movements in bond yields, according to benefits consultant Mercer.

That is good news, especially for the defined benefit pension market where around 90 per cent of all schemes are understood to be struggling with significant funding shortfalls following the collapse in share prices over the past two years.

Noel Collins, a senior investment consultant with Mercer, says global and European stock markets have rallied by about 25 per cent from the levels seen earlier in the year. The Iseq index of Irish stocks has jumped by about 35 per cent over the same period.

On the other hand, long-term interest rates – which determine the financial liabilities of pension funds – have moved upwards as markets take note of the “green shoots of recovery” and price in the prospect of a return of inflation over the next few years.

“The recent good experience will have reduced pension deficits by a factor of approximately one-third,” Mr Collins said yesterday.

However, he warned that most pension funds continued to face financial difficulties.

“Significant deficit positions remain and will need to be tackled regardless of future investment returns. Equity markets had fallen to extremely low levels so some bounce back was always to be expected.

“It remains to be seen whether the improvements are sustained into the second half of the year.”

He said the market rallies provided funds with a window to address underlying issues such as increasing life expectancy and lower interest rates than had been factored in historically.

“To provide a more solid financial footing for the future, most schemes require a thorough review of benefit and contribution levels, as well as continuing to address the risk levels in their portfolios,” he said.