Maurice Whyms, John Feely and Tara Flynn have recently founded Attain Consulting Limited

The total pension accounting deficit for Irish based ISEQ quoted companies has been estimated at 12-14% of their market capitalisation, according to a study conducted by Attain Consulting. This amounts to €3.5 billion which would have been greater 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. It estimates that the current accounting deficits could amount to, on average, between 12% and 14% of the market capitalisation of the companies involved. It notes, however, that, were it not for the widening of credit spreads in the discount rate, this deficit figure could be closer to 40%.”

“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,” commented Maurice Whyms, director of Attain Consulting. “This is a reflection of the increased risk in the corporate bond market as a result of the credit crunch.”

But 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.