Pensions deficit in Ireland’s largest companies grows almost 40%

The financial hole in the pensions funds of Ireland's largest companies jumped almost 40 per cent last year, according to a new report.

The study of 26 private- and public-sector companies with final-salary, or defined-benefit, pension schemes said the deficit had jumped from €2.6 billion in 2015 to €3.6 billion at the end of last year.

The companies with the worst deficits in cash terms were Diageo (€1.1 billion), CIÉ (€730 million) and Bank of Ireland (€446 million).

Conor Daly, partner at consultants Lane Clark & Peacock (LCP) which carries out the survey annually, said the overall figure would have been much worse but for “some notable liability management exercises undertaken by individual companies”.

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Liability management generally involves a reduction in benefits for members or greater contributions. It can also involve closing schemes to either new members or to future accrual – meaning existing members have final-salary cover for only part of the working life.

The report notes that Bord na Móna cut benefits and paid significant one-off contributions into its scheme while Kerry Group closed its Irish pension schemes to future accrual and carried out a transfer value exercise.

Despite the €1 billion leap in deficits, the average deficit in the pension funds examined was stable at 85 per cent, according to the study published on Friday.

LCP notes that this 15 percentage point gap to full funding has remained largely unchanged since 2010 even though companies and their employees have put €9.6 billion into the pension funds in contributions and stock markets have hit recurring record highs.

Bond yields

“The main reason for funding levels remaining stubbornly low has been the sharp and prolonged fall in euro-zone bond yields over the same period,” said Mr Daly. Pension funds are obliged to calculate their liabilities by reference to the yield on bonds. Liabilities rise as yields fall.

“It is clear that pensions remain one of the most significant costs for these organisations,” said LCP, noting that the companies studied had paid a total of more than €1.1 billion into their pension schemes last year.

The report – the ninth annual assessment by LCP – examines the position of 11 of the largest Irish stock market-listed companies measured by their market capitalisation that have defined-benefit pension schemes. It also covers 11 semi-State/State-controlled companies and four other listed private-sector companies that have significant defined-benefit pension schemes in Ireland.

LCP noted that Irish funds hold a higher proportion of listed shares than those elsewhere. Average equity holdings among the companies organised was 41 per cent. That compares with an average of 26 per cent in the UK, LCP says. A number of Irish companies in the study had equity exposure of more than 60 per cent.

Looking to performance in the current year, Mr Daly said that, up to the end of October, despite some volatility, LCP did not expect any “significant” change in the size of pension deficits in 2017.