Pension scheme benefit amendments implemented by top Irish companies reduce balance sheet liabilities by more than €2bn
13 October 2011

Defined Benefit pension liabilities of the top 30 publicly quoted Irish companies and 11 semi-state companies stood at c. €24bn in 2010 company accounts, according to a report released today, 13 October, by LCP Ireland.

Companies have also begun to implement amendment to benefits (including in some cases the imposition of significant benefit reductions on defined benefit scheme members), according to the LCP report. In the companies analysed, LCP found that approximately half of the companies had recognised a reduction in their pension liabilities following amendments to pension benefits during 2010.

• Bank of Ireland implemented a number of amendments to benefits resulting in an overall reduction in the pension liability of €733m.

• Many other companies (e.g. Independent News and Media, Glanbia) implemented amendments to pension benefits resulting in significant improvements to balance sheets.

• ESB reduced a disclosed deficit of €2.2bn to a residual liability of €897m following an agreement on pension amendments with the ESB Group of Unions and a change in the accounting treatment from defined benefit to defined contribution.

The LCP report also found that the market capitalisation of the top three Irish banks - AIB, Bank of Ireland and Irish Life and Permanent - is so dwarfed by pension liabilities that it will inevitably be a significant factor for any planned corporate transactions such as mergers, take-overs, acquisitions and planned growth. AIB's pension liabilities at 31 December 2010 were more than 12 times the size of its market capitalisation.

According to Conor Daly, Partner at LCP Ireland, "The report shows that the scale of pension liabilities is a significant challenge for many of Ireland's top companies. Contributions remain at very high levels despite the economic downturn. However, it is also clear that an increasing number of companies are seeking to share the burden of meeting these liabilities with the membership through various forms of benefit reductions. This is a trend we expect to see continue.

"The traditional view of the Defined Benefit pension scheme being a solid pension for life is clearly being undermined by the recent experience and the increased examples of burden sharing with the membership. Indeed, the very existence of Defined Benefit as a form of employee pension provision is under threat as sponsors become more resistant to demands for increased contributions. The recent introduction of the Pension Levy has served to further erode confidence. We expect very few Defined Benefit schemes will exist in their current form in five years time"

Key findings of the study by LCP include:

• Of the companies analysed, only three reported that they had sufficient assets to meet their accounting liabilities. These are RTE, Anglo Irish Bank and the National Treasury Management Agency.

• The average pension scheme continues to show a substantial shortfall, with the average deficit running at 17% of market capitalisation for companies analysed.

• Contributions paid during 2010 represented on average 2.8 times the cost of that year's pension accrual as companies sought to tackle past service deficits.

• Irish defined benefit pension schemes continue to have a higher than average allocation of assets to equities. During 2010, the percentage of assets of pension schemes in Ireland that were allocated to equities fell by only 1 percentage point to 58%. In the UK it fell to 43% in 2010 from 46% in 2009. Pension funds in over half of OECD countries hold 30% or less in equities, while bonds continue to be the dominant asset class accounting for (on average) 50% of total assets (Ref: OECD July 2011).

Banks liabilities vs market capitalisation:

• AIB reported a total defined benefit liability of €3.9bn at the company's year-end reporting date. This compares to its market capitalisation at the same date of €324m

• Bank of Ireland reported defined benefit pension liabilities of €4.5bn and had a market capitalisation of €2bn at their reporting date.

• Irish Life & Permanent had a market capitalisation of €299m at their year-end and reported liabilities of €1.3bn.

Five largest deficits reported by:

Highest funding levels reported by:

For further information please contact:

Conor Daly, Partner, LCP Ireland Ltd +353 (0)1 6144393 conor.daly@lcpireland.com
Roisin O'Connell, Eolas Communications +353 87 9193333 roisin@eolaspr.com

Notes to editors

This is the third year that LCP Ireland has published its 'Accounting for Pensions' briefing for Ireland. LCP's analysis covers 21 of the largest companies (by market capitalisation) listed on the Irish Stock Exchange that have defined benefit pension arrangements (of the largest 30 companies, 9 have not reported any material defined benefit pension arrangements). It also covers 11 semi-state companies with defined benefit pension schemes that have published pension accounting information for their 2010 financial year.

The information and conclusions in LCP's analysis are based solely on detailed analysis of the information companies have disclosed in their annual report and accounts for their 2010 financial year and other publicly available information

About LCP

LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. The firm has more than 500 staff with locations in Dublin, the UK, Europe and Abu Dhabi. Further information can be found at www.lcpireland.com

LCP is part of the Alexander Forbes group of companies, which employs over 4,000 people internationally. For more information on Alexander Forbes and its insurance, risk and financial services, please visit the website at www.alexanderforbes.com.