Rising bond rates cushion Irish pensions amid stocks chaos

Pension deficits across companies listed on the Irish stock market remained steady at €1.2 billion in the first quarter of the year. This was due to the impact from stock market chaos on assets being offset by a decline in liabilities as market interest rates on corporate bonds rose, according to employment benefits consultants Mercer.

The report refers to legacy defined benefit pension schemes, where retirees’ income is based off final salary. Most companies have moved en masse in recent decades towards defined contribution (DC) plans, tied to the performance of employer and employee investments.

Mercer estimates that assets held by pension schemes fell by 5-15 per cent, depending on their level of equity holdings, driven by a 19 per cent decline in global stock markets over the course of the quarter as Covid-19 rattled investors. Markets stabilised somewhat toward the end of March.

However, the liabilities side of pensions are valued using the market interest rate – or yield – attached to high-quality, or AA-rated, corporate bonds.

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An increase in corporate bond yields during the first three months of the year served to lower the defined benefit pension liabilities of Iseq companies 6-15 per cent, according to Mercer.

"The first quarter of 2020 was unprecedented in the level of market reaction to the global impact of Covid-19. However, defined benefit schemes in Ireland have generally fared well in comparison to the market collapse of 2008 due to higher allocations to high-quality sovereign bonds, and increasingly diversified investment strategies," said Peter Gray, corporate consulting leader with Mercer in Ireland.

Scenario plan

Still, Mercer is advising pension fund trustees and sponsors to scenario plan for the possible economic disruption of a second, or extended, coronavirus.

“As with any crisis, there are potential investment opportunities that both companies and trustees may wish to explore, relating to hedging inflation risk, accessing corporate bonds at more attractive entry points, and diversifying from volatile listed assets such as listed equities.”

Meanwhile, Fianna Fáil TD Seán Fleming has called on the Minister for Finance to consider allowing people with defined contribution pensions the opportunity to access additional voluntary contributions (AVCs) they would have made to their plans in the past – in order to help individuals deal with the economic crisis.

At present, the funds can be accessed only when a person reaches retirement. However, the Government introduced a three-year measure in 2013 to allow people to access up to 30 per cent of their AVC funds prior to their retirement.

“I think it is time for the Government to consider bringing this provision back,” said Mr Fleming. “If done correctly and with restrictions in place and for a limited time, it would ensure that people can access their funds now to help them through their impending financial difficulties, but still have a proper well-funded pension in place when retirement comes.”