Stock market rally helps drive down pension deficits

Study finds combined pension deficits of Iseq firms fell 56 per cent to €1.1 billion in 2017

New figures from Mercer show the combined pension deficits of Iseq listed companies more than halved to €1.1 billion during the course of 2017. Photograph: Frank Miller

Higher bond yields and bullish stock markets helped drive down pension deficits at Iseq-listed companies down by more than 50 per cent last year.

According to consultancy firm Mercer, the combined pension deficits of Iseq constituents fell from €2.5 billion to €1.1 billion during the course of 2017.

“Discount rates, used by companies to value their pension schemes which are based on corporate bond yields, rose by approximately 0.2 per cent for the average scheme, decreasing liabilities by 3 per cent year on year,” the consultancy said.

“This, coupled with positive returns on the majority of asset classes, which have generally ranged between 3 per cent and 5 per cent, has delivered a positive impact for the health of defined benefit pension schemes in 2017, and contrasts with 2016 where declining bond yields helped drive deficits up by €1.5 billion,” it said.


Corporate bond yields across Europe rose sharply over the first two quarters of 2017 on foot of more positive noises from the European Central Bank about the possible tapering of its long-standing bond-buying programme, reducing the value of defined benefit liabilities.

While this rise was partly reversed in subsequent quarters as investor exuberance cooled , year-end discount rates remained above their position at the beginning of the year.

All-time lows

While yields have risen, Mercer noted they remain close to all-time lows.

“The low yield environment is, in part, being driven by the ECB quantitative easing programme and with quantitative tightening on the horizon there will be many interested parties monitoring the impact on yields,” it said.

Stronger global growth, particularly in the euro zone, combined with improving corporate profitability kept stocks on a bullish track 2017 providing another shot in the arm for pensions.

Even with the uncertainty created by Brexit, the euro zone is finally showing stronger growth, thanks to increased consumer confidence, falling unemployment and accommodative monetary policy from the ECB, Mercer said, noting growith was also strong in the US, Canada and Japan, demonstrating the increased level of synchronised growth globally.

Peter Gray, senior consultant with Mercer's strategic solutions group, said: "2017 has seen the overall deficit at Irish listed companies decrease by €1.4 billion due to an increase in corporate bond yields."

“With liabilities in excess of €20 billion, even a relatively modest increase in bond yields can have a substantial effect on reported deficits.”

“ Further adding to the good news from the schemes perspective is that the rise in yields has not coincided with a rise in inflation expectations, which remain somewhat subdued,” he said.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times