ISEQ-listed firms in €3.5bn pension deficit

THE 27 quoted companies on the Irish Stock Exchange who operate defined benefit pensions schemes are running deficits totalling €3.5 billion, according to a study conducted by Attain Consulting.

The total pension accounting deficit for Irish- based ISEQ quoted companies has been estimated at 12-14% of their market capitalisation, Attain calculates.

“Having regard to the falls in asset values and movements in bond yields, we estimate the total pension accounting deficit for Irish- based ISEQ quoted companies was close to €3.5bn by the end of August, with the result that a lot of the hard-earned recovery since the middle of the decade has been given up,” the report states.

Attain estimates that the deficit of €3.5bn would have been greater, close to 40% of combined market capitalisation, but for a widening of the credit risk in corporate bonds.

The report warns that if credit spreads revert to their norm, then the impact on pension accounting deficits will be dramatic.

The report, entitled Accounting for Pensions in Ireland — Don’t Discount the Discount Rate, finds that as a result of the fall in the market capitalisation of companies on the Irish Stock Market, pension schemes have become a lot more significant relative to the size of the sponsoring companies.

Maurice Whyms, director of Attain Consulting, said: “The pension accounting deficit would have been much worse but for the fact that yields on long dated AA rated corporate bonds have risen since the beginning of 2008, largely as a result of a widening in the spread between Government bonds and corporate bonds.

“This is a reflection of the increased risk in the corporate bond market as a result of the credit crunch.”

However, Mr Whyms points out that a reduction in corporate bond yields from their current levels, without a recovery in financial markets, would have a dramatic effect on the reporting of pension deficits in company financial statements.

“One of the main risks for companies on the accounting front is that at some point, credit spreads may start to narrow down towards longer term norms, particularly if the stocks that were responsible for causing the spreads to widen are re-rated in the future and taken out of the AA bracket. The figure of 40% provides some indication of the potential impact were this to happen and all other things remained equal,” he added.

The companies surveyed include: Abbey, AIB, Anglo Irish Bank, Bank of Ireland, C&C, CRH, DCC, Donegal Creameries, Elan, FBD, Fyffes, Glanbia, Grafton, Group, Greencore, IAWS, IFG, Independent News and Media, Irish Life and Permanent, Irish Continental Group, Kerry Group, Kingspan, McInerney, Origin Enterprises, Readymix, Smurfit Kappa Group, United Drug and Waterford Wedgwood.