RISE in interest rates is proving a boon for traditional company pension plans.
Higher interest paid on corporate bonds means Irish defined-benefit pension schemes could post a €1 billion surplus after years of deficits.
The pension schemes of companies listed on the Irish Stock Exchange have performed well in the first half of 2022 despite significant declines in global stock markets, according to analysis by Mercer.
The pension consultants estimate that the cumulative position of the balance sheet of the defined benefit plans of the Iseq companies could be in excess of more than one billion euros at the end of June 2022.
This was mainly due to the fact that corporate bond yields rose by around 2 percentage points year-over-year
This has led to a decrease in liabilities on the balance sheets of companies by 25 to 30%.
And the gain comes despite global stock markets falling about 20% in the first six months of the year.
Defined benefit plans are those where employees are promised a fixed pension based on their years of service and final salary.
The liabilities of these plans are measured against bond yields.
Rising bond yields boosted defined benefit plans as they translated into lower liabilities.
However, the news is not so good for those with defined contribution plans.
This is a retirement plan where what you get in retirement depends on how much you have saved, the return on the investment and how long the funds have been invested.
After a long period of positive returns, most defined-contribution pension plans will have fallen over the past six months, Mercer said.
This is due to the fact that the stock markets have fallen over the past few months.
However, this follows a long period of positive investment returns and most diversified investment funds will continue to post positive returns overall in recent years.
The assets of the defined benefit plans of the Iseq companies have also decreased.
But lower liabilities offset negative returns on pension plan assets.
A surplus of €1bn for Irish listed company pension schemes shrinks to a deficit of €4.5bn in December 2016.
Christopher Delaney, head of corporate pension accounting at Mercer, said: “If current conditions persist through year-end, the position of defined benefit pension plans on company balance sheets will have moved into a significant surplus for the first time in many years.”
He said falling liability values driven by sharp increases in bond yields more than offset rising inflation expectations and large negative returns from stocks and other more volatile growth assets.
For the minority of companies with an open DB plan, the annual cost of providing a DB pension to employees can drop significantly.
“However, the cash contributions companies are required to make to their schemes will not automatically reflect improvements in funding levels, as these contribution rates are typically calculated every three years.”
Mr Delaney said the contribution rates agreed over the past 18-month year are unlikely to take into account the recent improvement in funding levels.
He said companies affected by this may wish to engage with their pension plan administrators to determine if their contribution rates can be revised to reflect recent changes.
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