Una McCaffrey

One of the nastier side-effects of the stock market slide of 2000 and 2001 was the very public hole that it left behind in the equity-based pension funds of numerous Irish companies. The problem was widespread, with sizeable pension deficits in evidence in firms ranging from AIB and Bank of Ireland to Waterford Wedgwood and Ulster Television.

Private companies have felt their share of the pain too, with The Irish Times among those nursing a multi-million pensions shortfall at the end of 2002.

One year on, however, the picture looks to be brightening slightly, with 12 months of equity gains now under the belts of even the more conservative pension funds. Coupled with this has been a slow rise in bond yields, which has reduced the accounting value of a pension fund's future liabilities under the FRS 17 standard.

The question for firms struggling with massive deficits is exactly how last year's average pension fund rise of 12.6 per cent and more limited increase in bond yields will translate into their own retirement pot and, by extension, affect their accounts.

Under the FRS 17 standard, which has been widely accepted by the Irish corporate world, firms must disclose the health of their pension scheme on their balance sheets. This allows investors get a precise idea of how much the firm "owes" to its pensioners and, if they so wish, treat that obligation as a form of debt.

Mr Pat Lardner, director of Bank of Ireland Asset Management, says such an approach would be common among fund managers, with particular attention falling on any unrealistic or "heroic" assumptions from companies on how their various shortfalls might be met.

Mr Lardner points out, however, that the pension information that is now habitually detailed under FRS 17 was always available, at least to those who sought it - the standard merely makes it more prominent. It should also be recognised that FRS 17 will apply differently according to the activities of a company, its structure, its staff levels and its profitability.

Thus, the €30.8 million FRS 17 deficit recorded by The Irish Times in 2002 can not be directly compared to AIB's €710 million pensions hole or Bank of Ireland's €799 million shortfall. Neither can any of these be measured according to the €162 million pensions deficit revealed by Waterford Wedgwood a couple of months ago. This gave rise to particular alarm because it was of a similar value to the company itself but, notably, appeared to be far from the mind of institutional investors' minds when they piled into Waterford's rights issue.

Whatever the company, Mr Joe Byrne, deputy managing director with pensions consultant Coyle Hamilton, believes the 2003 pension gains must be placed into firm context. The 12.6 per cent average rise, he suggests, only surpasses minimal expectations by about 4 per cent - a gain that will have been wiped out by salary inflation. He admits the problem is moving in the right direction, but cautions that the value of the improvement will vary from company to company and fund to fund.

This means that a company in the disastrous position of having a pension fund worth €100 million and a deficit of €30 million this time last year could have seen that shortfall diminish by up to 42 per cent, while others will have experienced less-dramatic benefits. For these less-fortunate firms, Mr Byrne believes a few more years of equity gains will be needed before the pensions nightmare disappears.