Pension deficits at Iseq-listed companies fall €200m

Stocks still below end-2019 level and falling bond yields and inflation push liabilities higher

Deficits in the final salary pension schemes of Iseq-listed companies fell by €200 million in the second quarter despite the Covid shutdown.

Deficits in the final salary pension schemes of Iseq-listed companies fell by €200 million in the second quarter despite the Covid shutdown.

 

Deficits in the final salary pension schemes of Iseq-listed companies fell by €200 million in the second quarter despite the Covid shutdown, due to significant increases in global equity markets, according to analysis published by pensions expert Mercer.

Overall, Mercer estimates that the cumulative defined benefit (DB) balance sheet deficits for these companies improved from €1.2 billion at the end of the first quarter to €1 billion in aggregate at the end of the second quarter. Stock markets rebounded by about 15 per cent in the second quarter, improving the position of many pension funds.

However, despite the rally, stock markets are still below where they were at the beginning of the year. European markets are down over 10 per cent and, while US stocks have performed better, they are still down about 5 per cent.

Mercer said the rebound in equities was enough to offset an increase in the value of liabilities. This was due to a reduction in corporate bond yields in the quarter, as central banks responded to the global pandemic by implementing huge fiscal stimulus programs.

Inflation expectations also rose slightly which, Mercer said, will have further increased scheme liabilities. However, inflation expectations remain below where they were at the beginning of the year.

“Falling discount rates and increased inflation expectations will have increased pension scheme liabilities about 5 per cent over the second quarter,” Mercer noted.

Peter Gray, corporate consulting leader and principal at Mercer, said markets “remain volatile” as increased cases of Covid-19 cause concern for countries trying to contain the virus while keeping their economies afloat.

“Companies and trustees should consider potential downside risks and whether banking recent funding level improvements is appropriate,” he said.

Defined contribution

Mercer said members of defined contribution (DC) schemes will also have benefited from the recent rise in equity markets as the majority of default investment strategies contain significant allocations to equities.

The level of recent volatility “demonstrates the difficulty in trying to predict the market”, it noted. “Those who rode out the volatility likely to have fared better than those who chose to sell out of equity markets, thereby missing the strong rally in the second quarter.