LCP report pension deficits double during 2010
10 November 2010

The deficits of defined benefit pension schemes sponsored by Ireland's largest private sector companies and most significant state-owned bodies rose by an estimated €9bn since January 2010 to approximately €16bn at 30 September 2010.

This reflects the further dramatic falls in AA rated bond yields in the Eurozone area during 2010.

LCP Ireland Pensions Accounting Briefing 2010 analysed the performance of the defined benefit pension schemes of the top 25 companies listed in the Irish Stock Exchange and 12 state-owned bodies as reported in their annual accounts for 2009.

Key findings include:

• Aggregate deficits for the 33* company pension schemes stands at an estimated €16bn for their Irish pension schemes as at 30 September 2010 - an increase of €9bn since 1 January 2010;
• Aggregate deficits for the 12 state-owned companies stand at an estimated €7.3bn as at 30 September 2010. In aggregate these pension schemes hold only 54% of the assets required to meet the pension benefits already earned by members;
• Only three of the 33* companies reported that they had sufficient assets in the pension scheme to meet their accounting liabilities in their 2009 accounts. The highest funding level disclosed was that of Anglo Irish Bank with a funding level of 108% of assets over liabilities. Significantly, Anglo Irish Bank has the lowest proportion of equity holdings (34%);
• The largest deficit was reported by ESB as €2.2bn followed by Bank of Ireland with a deficit of €1.6bn. ESB also reported the largest deficit in 2008;
• When comparing their pension liabilities to market capitalisation, the banks' figures are particularly significant. As at the end of 2009, Bank of Ireland's pension liabilities were four times their market capitalisation and AIB's were almost three and a half times.

Some companies have taken action since 2009 to attempt to improve their pension deficits. Such actions include closing defined benefit schemes to new entrants, reviewing benefits for existing pension scheme members, increasing employee contributions, and making significant special contributions.

"Although a small number of companies have taken specific actions to try to control their pension deficits, there is little evidence that investment practices are adapting to the new economic climate when it comes to reducing risk within their pension schemes" commented Conor Daly, Partner, LCP Ireland.

"Irish pension schemes continue to have one of the highest levels of equity investment, by proportion, of any country in the world. There is a danger that in many cases, schemes are placing an over-reliance on the markets to 'grow' their way out of trouble. Employers need to control the cost of the benefits they are promising to members and manage their level of risk. If not, the individual members will be the ones to suffer when pension schemes don't have the funds to pay out benefits during retirement."

*Four of the top 25 private sector companies do not operate defined benefit schemes and were excluded from the report.