The aggregate Irish defined benefit (DB) pension scheme balance sheet position for ISEQ-listed companies could show a surplus of over €1bn at the end of December 2022, according to Mercer.

Despite all major asset classes ending the year in negative territory, with equity markets down by between 15 per cent and 20 per cent, DB schemes’ funding positions have improved.

Mercer primarily attributed the improvement to a 3 per cent increase in corporate bond yields in 2022, the largest 12-month rise in more than 10 years.

Rising bond yields resulted in company balance-sheet liabilities falling by between 25 per cent and 50 per cent, more than offsetting the negative impact of the fall in equity markets and other growth assets.

The fall in liabilities came despite high levels of inflation increasing liabilities, and while future inflation expectations increased by around 0.5 per cent during 2022, the rises have generally been surpassed by the reduction in liabilities due to the improvement in bond yields.

The €1bn surplus at the end of 2022 is in contrast to the small surplus at the beginning of the year and to the peak deficit of around €4.5bn in December 2016.

“The improvement in pension scheme funding positions will be welcome news for companies, trustees and members alike,” said Mercer corporate consulting leader, Peter Gray.

“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.

“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 – the corporate bond market remains volatile with yields down c. 0.35 per cent over January.

“Some schemes have de-risking frameworks already in place, which will have captured some of the gains from rising bond yields, but others will need to consider what to do next. This may involve increasing the amount of bonds and related assets they hold to better match expected cashflows and reduce future exposure to changes in bond yields.

“While transferring pension risk to an insurance company has traditionally been seen as too expensive, a combination of improved funding levels and a reduction in annuity pricing (again driven largely by the increase in bond yields) may present an opportunity for employers to explore annuity transactions with the scheme’s trustee board.”

Despite the improvements in DB scheme funding, Mercer described 2022 as a challenging year for defined contribution (DC) schemes due to falling asset values and rising inflation.

The consultancy noted that most DC members will be invested in funds containing a mix of equities, bond and other assets, and that these funds will have generally fallen by 5 per cent to 15 per cent over 2022.

However, it added that these funds would have delivered healthy returns over the past 10 years and that annuity prices are significantly lower than at the end of 2021.

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