The combined deficit of Ireland's largest defined benefit pension schemes increased by 4bn to 10bn euro over the 12 months to September 2012, Lane Clarke & Peacock said today.
Falling yields on the high quality euro corporate bonds used by companies to value their pension scheme liabilities mean the liability value for a typical pension scheme has increased by around 27% since December 2011, according to the consultancy's latest survey of Irish schemes.
Only one of the 19 firms included in the Pensions accounting briefing 2012 reported it had sufficient accounting assets to meet its liabilities at the end of 2011 - the Irish Bank Resolution Corporation, which recorded a funding level of 111%. This compares to three in 2010.
The firm, formerly known as the Anglo Irish Bank, is the only company to consistently report a fully funded DB pension scheme since LCP began its Irish survey in 2009. On average, the funding level last year for the pension schemes included in the survey was 86%.
Firms' pension schemes liabilities amounted to, on average, 33% of their market capitalisation in 2011, but in two cases - Smurfitt Kappa (207%) and Bank of Ireland (197%) - pension liabilities exceeded the company's market value.
LCP said that, while the companies analysed paid 1.2bn into their pension schemes last year, they remained under pressure from trustees, the Irish government and, potentially, Europe to contribute more to fund current and former employees' pensions.
This year, the Irish government introduced a new requirement for DB pension schemes to hold reserves in excess of their statutory minimum liabilities from 2016. This will add between 10-15% to the liabilities of an average pension scheme, LCP said.
Firms could also have to hold greater reserves if new capital funding requirements similar to those being applied to the European insurance industry under Solvency II are introduced for workplace pensions, it noted.
Further pressure could also come from changes due in 2013 to the IAS 19 accounting rule used by firms to value their pension assets and liabilities. This change, which affects how firms calculate the expected return on their pension assets when including it on their income statements, would have knocked around 100m off the 2011 profits for the firms included in the survey, LCP said.
Conor Daly, partner at LCP and one of the authors of the report, said: '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.'
'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.'
