Irish pension funds finished 2004 worse off, despite a 10.4 per cent growth in assets, as falling bond yields meant the fund's liabilities rose at an even faster rate.

The news will come as a blow to many companies which now face the prospect of reporting widening holes in the pension schemes on their balance sheets under new accounting rules.

Pension adviser Mercer says liabilities rose 15 per cent last year as a result of falling bond yields, frustrating efforts to recover the losses incurred by schemes following the bursting of the technology bubble. Low bond yields push up the cost of providing pensions.

"On first glance, it would appear that pension funds have experienced better times in 2004," said Mr Tom Murphy, head of Mercer Investment Consulting. "Unfortunately, that is not the case."

Coyle Hamilton Willis actuary Mr Shane Wall said the fall in bond yields was exacerbating problems caused by the fact that pensioners are living longer.

"The liabilities disclosed in company accounts will be significantly higher than last year," Mr Wall said. "For many schemes, interest rate movements [ which determine bond yields] and mortality improvements alone will cause liabilities to increase by 30 per cent or more."

Already last year, Pensions Board chief executive Ms Anne Maher said, 41 per cent of the 589 schemes reporting to it failed to meet the statutory minimum funding standard. One hundred and sixty applied for more time to get their schemes back in order.

Mr Murphy said the significant fall in bond yields meant that even some schemes that had filed funding proposals - required before any extension is granted - around this time last year might find themselves "off-track already".

"This time last year, we were being told that bond yields were at a historic lows and would fall no further," said Mr Murphy. "That clearly hasn't happened."

He said the latest projections were for a 3 per cent rise in yields in 2005 but, even if accurate, that would be nowhere near enough to offset last year's losses.

The Pensions Board has reviewed the statutory minimum funding standard and its findings have been sent to the Minister. Any changes will be included in the Social Welfare Bill 2005.

The liability issue has overshadowed the second successive double-digit return by Irish group-managed pension funds. The average fund recorded growth of 10.4 per cent last year after a 12.6 per cent return in 2003.

However, this has not been enough to offset poor returns in previous years. Over the past three years, the average Irish fund has grown by just 0.1 per cent annually and, over five years, the average fund is still in the red by half a percentage point each year. That is before accounting for any increase in liabilities in those periods.

In 2004, the best performer was again Irish Life with a return of 12.4 per cent ahead of Eagle Star at 11.8 per cent.

Performance varied widely with KBC Asset Management's managed pension fund assets growing just 7.1 per cent.