Large companies face double pension hit of higher accounting deficits and higher cash contributions in 2012 - Deloitte
Adverse market conditions will result in significantly bigger pension deficits on balance sheets.
Re-introduction of solvency test will mean many companies face higher pension cash demands during 2012.
According to Deloitte, the leading business advisory firm, accounting deficits of Irish defined benefit (DB) schemes are likely to be higher at 31 December 2011 compared to a year ago. This is due to the fact that corporate bond yields, which must be used to discount the liabilities, generally fell by about 0.5% - 0.6% over 2011. Most of this fall occurred in December. This is likely to have increased accounting liability valuations by between 5% - 15%, depending on the make-up of the scheme.
As a result, pension scheme asset values are likely to have fallen or, at best, remained broadly flat compared to December 2010, notwithstanding contributions paid in. These factors will act to reduce the net balance sheet assets of many Irish plcs, commercial semi-states and multinational subsidiaries. For the first two groups, it may have a direct knock on effect on their ability to re-finance existing debt or access new borrowings.
Patrick Cosgrave, Director, Total Rewards and Benefits, Deloitte, commented:
“Unfortunately, 2012 looks to be another difficult year for sponsors of DB schemes. For many companies, the increase in year-end accounting deficits will come as a surprise as market conditions were significantly more favourable in November 2011 compared to now. For those companies who budget based on November or prior year conditions, it will potentially mean significant upward revisions need to be made to projected costs.”
In addition to these adverse market conditions, the reintroduction during 2012 of the Minimum Funding Standard (MFS) funding test, as announced recently by the Government will also impact DB scheme sponsors. This test is the key determinant of cash contribution requirements and had been effectively suspended since 2008 as many schemes were not then solvent. Even though the position has generally worsened since 2008, employers will shortly have to consider funding an additional buffer (solvency margin) on top of the MFS liabilities, or as a potential alternative, providing a legally enforceable pension funding guarantee.
Cosgrave continued: “The higher cash demands expected in 2012 and the new requirement to provide for the buffer will result in many DB plan sponsors having to restructure their pension arrangements. Inevitably, the right solution for some will be to transition away from DB benefits altogether.”
The pressures on Irish pension schemes are similar to those in the UK where the results of a survey by the Association of Consulting Actuaries show that 91% of DB schemes are now closed to new entrants and four out of 10 no longer allow current participants to accrue additional benefits.
These changes exacerbate the gap between private and public sector pension provision. Changes to UK public sector pensions, whilst nothing as severe as those that have happened in the private sector, have resulted in widespread industrial action.
Cosgrave advised: “Before deciding on a course of action, Irish employers need to understand the cost/risk implications of the current strategy and the various options that are available. More creative and innovative solutions for funding and managing the liabilities of DB schemes have emerged in recent years and these should be taken into account in any review. It will also be critically important for employers to consider the longer term implications of any changes, for example on staff morale and retention, to ensure that the resulting strategy is robust and future proof.”