ISEQ pension deficits reduce by €200m in Q2 – Mercer

The deficits of pension schemes in ISEQ-listed companies reduced by €200m over the second quarter (Q2), according to the latest data from Mercer.

This was due to significant increases in global equity markets, analysis by Mercer found. It is estimated that the cumulative DB balance sheet deficits for these companies reduced from €1.2bn at the end of Q1 to €1bn in aggregate at the end of Q2.
Equity markets rebounded by c.15 per cent in Q2, improving pension scheme funding positions. However, despite the rally, equity markets are still below where they were at the beginning of the year. European stock markets are down over 10 per cent, and while US stocks have performed better, they are still down c.5 per cent.

However, the NASDAQ Composite Index is up c.10 per cent year-to-date, but Mercer explained that this index has a greater weighting of technology and internet related stocks, which have performed well.

The rebound in equities was enough to offset an increase in the value of liabilities. This was due to a reduction in corporate bond yields in the second quarter, as central banks responded to the global pandemic by implementing huge fiscal stimulus programs. Discount rates fell by c.30bps in Q2, but remained c.15bps higher than at the beginning of the year. Companies reference AA corporate bonds to measure DB pension scheme liabilities.

Inflation expectations also rose slightly which will have further increased scheme liabilities, but inflation expectations remain below where they were at the beginning of the year. Falling discount rates and increased inflation expectations will have increased pension scheme liabilities c.5 per cent over Q2.

Commenting, Mercer corporate consulting leader and principal, Peter Gray, said: “The second quarter of 2020 has generally been positive for pension scheme funding levels, with reported balance sheet pension deficits reducing.

“However, markets remain volatile as increased cases of Covid-19 cause concern for countries trying to contain the virus while keeping their economies afloat. Companies and trustees should consider potential downside risks and whether banking recent funding level improvements is appropriate.”

Mercer noted that pension fund trustees focus on their scheme’s ongoing funding level and satisfying the statutory solvency test, rather than the pension deficit on the company’s balance sheet. Increases in equity values and other growth markets will have improved general funding levels in Q2. However, as the full economic impact of the pandemic remains to be seen, trustees will be concerned about the ability of companies to fund schemes over the longer term.

“The Pensions Authority has recently announced that it will place an increased focus on governance and risk management in light of the expected implementation of the IORP II EU Pension Directive. It will undertake an assessment of the risks faced by DB pension schemes and the ability of the scheme trustees to assess and manage those risks.

“This will inevitably lead to conversations between employers and trustees regarding the long-term sustainability of schemes and the potential for alternative forms of security. This might include, such things as non-cash funding or contingent assets to provide greater investment flexibility and security to schemes while allowing cash preservation for sponsors,” Gray noted.

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