Irish pensions in trouble despite stock market recovery

Despite a strong recovery in world stock markets, pension deficits in Ireland's top companies have soared – doubling in less than a year to over €8.5 billion by last August. A pension survey by financial consultants, LCP Ireland, which analysed 29 defined benefit – or final salary – schemes in 16 publicly -listed and 13 semi-state companies, found just one was fully funded for pension purposes. Only RTÉ had sufficient assets to meet its liabilities in the event of a wind-up of its fund.

The size of the funding gap that so many of Ireland's top companies face – including Bank of Ireland, CRH, CIÉ and Smurfit Kappa – illustrates the gravity and extent of the pension crisis. Pension deficits in these companies have increased, despite a large increase in employer contributions (€1.67 billion in 2013) to company schemes, and a sharp cut in some members' retirement benefits. As this group of 29 companies struggles at great cost to eliminate deficits, the challenge facing smaller companies, which are inevitably less well-resourced financially, remains a truly daunting one.

Why at a time of increased employer contributions, of cuts in pension benefits and buoyant equity markets, in which pension funds remain heavily invested, have their liabilities increased? Pension fund liabilities are calculated on the basis of the risk free return that top quality sovereign bonds, like those of Germany, offer and that are used to buy retirement annuities. However, as euro zone bond yields have contracted this year – depressed by central banks lowering interest rates to accelerate economy recovery – the cost of buying a pension annuity has soared. This, in turn, has increased a company's pension liabilities, offsetting its fund's equity investment gains.

The pension levy has further compounded the difficulties faced by defined benefit and other pension schemes. The Government in taking €2.3 billion out of private pensions has made a bad situation far worse for pension contributors, by ensuring their financial prospects in retirement will be significantly diminished.