The rising interest rate environment and subsequent increase in bond yields helped to shore up the funding positions of the defined benefit (DB) pension schemes of ISEQ companies in 2022.
According to an analysis by Mercer, most Dublin-listed company DB schemes will likely be in surplus, despite all the major asset classes ending the year in negative territory.
The rise in corporate bond yields by over 3% in the year - the biggest 12 month increase in over a decade - resulted in a reduction in the value of pension scheme liabilities which more than offset the fall in pension scheme assets, Mercer concluded.
"The rise in bond yields, triggered by the Central Bank's efforts to control inflation, has seen a marked improvement in the financial position of DB pension schemes," Peter Gray, Corporate Consulting Leader with Mercer said.
"The key questions are whether these higher yields will persist as inflation comes under control and how to take advantage of the current improved position," he added.
The corporate bond market remains volatile, however, with yields down by around 0.35% over January this year.
Mercer estimates that the aggregate DB balance-sheet position for ISEQ-listed companies could be a surplus of over €1 billion at the end of 2022.
That compares to a small surplus at the beginning of the year and very significant multibillion-euro deficits at times over the last decade.
The deficits peaked at around €4.5 billion in late 2016.
Unlike Defined Contribution (DC) schemes - which most working individuals would now be paying into - DB schemes offer a guaranteed income upon retirement, linked to final salary and in line with inflation, regardless of the performance of the fund's investments.
Members of DC schemes will inevitably have seen the value of their retirement pots fall over 2022, Mercer states.
With most DC members invested in diversified funds containing a mix of equities, bonds and other assets, it estimates that they will generally have fallen by 5% to 15% over 2022, depending on the structure of the fund.
However, Mercer points out that such funds would have delivered healthy returns over the past 10 years and, for any members looking to secure an annuity, annuity prices are now significantly lower when compared with year-end 2021.
