Effort to derisk pension schemes has come back to haunt them

Surge in stock markets of little benefit to schemes as they cut exposure to equities

Government and corporate debt market yields fell sharply this year, hitting pension schemes’ returns from bonds.

Government and corporate debt market yields fell sharply this year, hitting pension schemes’ returns from bonds.

 

Pensions are supposed to be a reassuring feature of the workplace – comfort that there will be a level of financial security in retirement. But for those companies still offering final-salary, or defined-benefit pension schemes, a new report from Lane, Clark and Peacock Ireland (LCP) provides little in the way of comfort or reassurance.

LCP has been examining the pension exposure of some of Ireland’s largest organisations annually over the past decade. It studies 15 of the largest listed companies by market capitalisation that still offer defined-benefit arrangements to staff, and also 11 large semi-State or State-controlled companies, such as An Post, the Central Bank and CIÉ.

On the surface, the figures this year are good. The combined pension deficit – liabilities minus the current value of assets – of the group halved from €2.2 billion at the end of 2017 to €1.1 billion at the end of last year.

But pensions are a volatile game. And, to prove the point, LCP estimates that the 26 companies surveyed have, in the first nine months of 2019, surrendered all the gains of last year, and more. It projects that the aggregate pension scheme deficit among them has almost trebled this year to €3 billion.

Ironically, it is efforts by the companies to derisk their pension schemes that has come back to haunt them.

Stock markets have had a standout year in 2019, with the S&P 500 index 25 per cent ahead on the year to date. But that was of little benefit to the companies as they cut their exposure to equities sharply.

Much of this money has moved into bonds but, unfortunately, government and corporate debt market yields fell sharply, hitting returns.

Of course, the risk inherent in pensions doesn’t disappear simply because companies switch their commitment from final-salary to defined-contribution pension arrangements: it simply gets transferred from the company to the individual. With autoenrolment looming, the question is whether those individual workers can do any better managing risk than the big corporates with their well-paid expertise.

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