Defined Benefit pension schemes fail to stabilise despite risk management strategies and increased contributions, according to Lane Clark & Peacock Ireland (LCP Ireland) survey.?
The latest survey conducted by ?LCP Ireland ?into the largest defined benefit pension schemes in Ireland reports that deficits rose by €4 billion in the 12 months to September 2012. LCP Ireland also reports that difficulties posed by the challenging economic climate, changes to domestic legislation and international accounting rules will force the closure of many defined benefit pension schemes.
The key findings of the report include:
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The combined net accounting deficit of pension schemes analysed increased to €10 billion at 30 September 2012
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Pension schemes are starting to withdraw from the equity markets. The 2011 survey shows an average equity asset allocation across the companies analysed of 52%. This is down from 58% in 2010 but is still excessive when compared to international practices. Defined benefit pension schemes operated by FTSE100 companies held just 35% of their assets in equities at the end of 2011
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Pensions liabilities were well in excess of market capitalisation of many of the listed companies analysed
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The average funding level (assets as a proportion of liabilities) for the companies analysed was 86% in 2011
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Only 1 company, Irish Bank Resolution Corporation (formerly Anglo Irish Bank), reported their pension scheme to be fully funded compared with 3 last year. This company is the only company to have consistently reported a fully funded defined benefit pension scheme since LCP Ireland began reporting on this survey in 2009
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IBRC also disclosed the lowest equity allocation of all the companies analysed: 23% in 2011 down from 34% in 2010 and well below the 2011 average of 52%
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The pension deficit reported by AIB almost doubled from €400 million reported in 2010 to €763 million in 2011
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The companies analysed paid a combined total contribution of €1.2 billion to their pension schemes in 2011. However, a large proportion of this went towards removing deficits in their defined benefit schemes rather than boosting benefit accrual for current employees
The companies analysed in the LCP Ireland report contributed an estimated €120 million to the Exchequer through the pensions levy introduced in 2011. The levy raised a total of c. €460 million in its first year and has become a significant source of revenue to the Irish Government. According to LCP Ireland, this may be difficult to replace and therefore, there is a risk that despite its promised four-year term that the levy may be extended to future years.
The Irish Government provided clarity surrounding pension regulation in 2011. However, the introduction of Risk Reserves, challenging deadlines, new disclosure requirements and limited potential relief in the form of sovereign bonds/annuities means that companies and trustees may have to introduce significant changes to their pension arrangements to ensure their survival. These may include further increases to contributions, benefit reductions and other measures including the possibility of scheme windup. LCP Ireland estimates that the Risk Reserve requirements alone could add up to 15% to the liabilities of a typical pension scheme.
There is growing evidence of pension schemes taking steps to address these challenges through changes to investment strategies and benefits. Risk-sharing (RTÉ), use of contingent assets (Diageo) and increased employee contributions (Bord na Móna) are among the tools used by some of the companies analysed. Some companies (eg AIB) plan to use defined contribution plans for future service. Other employers (eg Arnotts) have given notice of their intention to cease contributions to their defined benefit plans.
Further challenges come from changes to international pensions accounting standards due to come into force next year. These new rules will see a hit to profits for most companies. LCP Ireland estimates that the 2011 profits for the companies reporting under IAS19 would have been c. €100 million lower if recalculated under the new standard.
"The combination of challenges posed by the current economic climate, potential changes to tax rules, changes to accounting standards, reintroduction of the Funding Standard and Risk Reserve requirements will make the future of many defined benefit schemes untenable", stated Conor Daly, partner at LCP and one of the authors of the report. "We believe that a significant number of these schemes will wind up in the next 18 months. In the absence of innovative measures from Government and steps to extend working lifetimes, the current trend to provide lower value defined contribution-type pension arrangements will continue."?
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