IRELAND - Irish listed companies with defined benefit schemes have pensions accounting deficits worth approximately €3.5bn or 12-14% of their market capitalisation, suggests analysis conducted by Attain Consulting.

In the firm's latest white paper on pensions accounting, entitled Don't discount the discount rate, Attain warned the total pension accounting deficit for Irish-based ISEQ quoted companies could look a lot worse and the deficit on paper would widen to as far as 40% if the credit spreads on AA-rated bonds - used to generate the  discount rate - revert to their norm.

The consultants acknowledge the calculations companies use to apply the IAS19 requirement only applies a company's profit and loss balance sheet, so the actual value of a pension fund's assets are likely to be worse at present because of the losses felt in the investment markets.

That said, its analysis of the results of 11 listed companies has found the pensions accounting deficit could have looked substantially worse because whereas spreads would in the past have been approximately 50 basis points higher than the index or corporate bonds a company is likely to use, that spreads has widened this year to be more than 200 basis points higher because of the increased risk in the bond market.

Most pension funds will likely use the performance of the iBoxx corporate bonds index to calculate the discount rate and the spreads over it, and Attain has estimated a 0.1% increase on the discount rate a company uses reduces liabilities by between 1.5% and 2.3%, depending on the nature and duration of a scheme's pension liabilities.

Should corporate bond spreads eventually reduce, pension funds' accounting liabilities will appear to increase by over 25%.

The situation is further complicated, however, said Attain, because the bond stock a company selects in its discount rate calculation is required to be of a similar duration to liabilities and of the same currency, yet there "the long-dated Eurozone AA-rated corporate bond market is very thin with just a handful of stocks" - just a dozen of iBoxx stocks have durations of 7 to 23 years - states the paper, and tend to have shorter durations than the pension scheme's liabilities so the rate they apply may need to change should a bond drop out of the index.

Equally as important, there are now huge differences in the yields between different sectors and the banking sector - which makes up over half of the AA-rated corporate bonds in the 10+ years market - has a yield 2% higher than industrials and utilities.

Attain is therefore suggesting adjustments to the index yield may be needed as the discount rates used by companies in recent months have been around 0.5% less than the 6.4% yield on the iBoxx 10+ AA-rated corporate bonds.

It is also recommending all companies with DB schemes be aware of how the discount rate is shifting and what it could mean for them, to try and prevent any surprises further down the road should bond yields fall and the market stay in its current state.

Attain Consulting was created earlier this year by Maurice Whyms, John Feely and TARA Flynn, three former employees of Mercer Ireland. (See earlier IPE story: Mercer trio launches new Irish consultancy)

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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