Rising interest rates are proving to be a blessing for classic company pension schemes.
The higher interest rates paid on corporate bonds mean that Ireland’s defined benefit plans could slide into a €1bn surplus after years of deficits.
According to an analysis by Mercer, the pension plans of Irish-listed companies have performed well in the first half of 2022 despite significant falls in global stock markets.
The pension consultants estimate that the cumulative balance sheet position of the defined benefit plans of the Iseq companies could show a surplus of over one billion euros at the end of June 2022.
This is largely due to the fact that corporate bond yields are up around 2 percentage points year-on-year
This has resulted in companies’ balance sheet liabilities falling by 25 to 30 percent.
And that despite a decline in global equity markets of around 20 percent in the first six months of the year.
Defined benefit plans are those in which employees are promised a defined pension based on their years of service and final salary.
Liabilities on these plans are measured in relation to bond yields.
The rise in bond yields has given a boost to defined benefit schemes as it has reduced liabilities.
However, the news is not so good for those with defined posting systems.
These are pension plans where your pension depends on how much you have saved, how the investment has performed and how long the funds have been invested.
After a long period of positive returns, most defined-contribution plans will have fallen over the past six months, Mercer said.
This is because stock markets have fallen over the past few months.
However, this is happening against the backdrop of a long period of positive investment returns, and most diversified mutual funds will still post overall positive returns in recent years.
The assets of the defined benefit plans of the Iseq companies have also decreased.
But the decline in liabilities has outweighed negative returns on pension fund assets.
A surplus of €1 billion for pension schemes in Irish listed companies compares to a deficit of €4.5 billion in December 2016.
Christopher Delaney, Mercer’s head of corporate pensions accounting, said, “If current conditions continue into year-end, the position of DB pension plans on company balance sheets will be in significant surplus for the first time in many years.”
He said the decline in liability values, caused by the sharp rise in bond yields, more than offset the rise in inflation expectations and the significant negative returns from equities and other higher volatility growth assets.
For the minority of companies with an open DB system, the annual cost of providing a DB pension to employees can drop significantly.
“However, the cash contributions companies are required to deposit into their systems do not automatically reflect improvements in funding levels, as these contribution rates are typically calculated every three years.”
Mr Delaney said the 18-month contribution rates agreed last year were unlikely to take into account the recent improvement in funding levels.
He said companies affected may want to work with their pension scheme trustees to see if their contribution rates can be revised to reflect recent changes.
https://www.independent.ie/business/personal-finance/pensions/company-pension-schemes-in-line-for-1bn-surplus-41868445.html Company pension scheme planned for a surplus of EUR 1 billion