Equity surge helps company pensions withstand pandemic
A SURGE in equity markets meant company pension schemes rode out the turmoil caused by the Covid-19 pandemic to end last year in a similar position to the previous year.
This meant the cumulative deficits of defined benefit schemes of companies listed on the Irish Stock Market was €1bn at the end of 2020, according to analysis by advisers Mercer.
A defined benefit pension is one where the retirement payscheme ment is guaranteed.
Most people, outside the public sector, have defined contribution pensions, where the pension amount depends on the funds put into it and the performance of the fund.
Mercer said strong market performances resulted in an increase in pension scheme assets for defined benefit schemes.
Global equity markets were up around 12pc and eurozone government bonds rose around 5pc.
This, in turn, was offset by the increase in pension liabilities resulting from falls in corporate bond yields, Mercer said.
Corporate consulting leader with Mercer Peter Gray said that although deficits remain largely unchanged over 2020, this does not tell the full story.
Pension scheme liabilities increased significantly during the first quarter of 2020 due to falling corporate bond yields.
This was before panic in the corporate bond market saw yields spike by around 100 basis points during March.
The schemes’ liabilities are what are owed to pension fund members.
Mr Gray said the spike in yields reduced pension scheme liabilities, but equity markets simultaneously fell dramatically, resulting in an overall deterioration in funding levels.
He said the remainder of the year saw Covid-19 related fears allay as huge stimulus packages were announced by major governments across the globe.
“As a result, deficits at the end of 2020 remained in line with the beginning of the year.”
He said 2020 has been an exceptional year, but pension deficits on company balance sheets have weathered the storm.
“That said, the experience in March demonstrates the volatility inherent in defined benefit schemes,” Mr Gray said.
He said companies are likely to try and reduce their exposure over time by de-risking and investing in liability matching assets.
This year is likely to see funding costs increase on top of anticipated increases in running costs due to new European legislation, Mercer said.
Deficits at the end of 2020 were in line with the start of the year