• 2008 year-end funded status for ISEQ drops to 61% compared to 90% at the end of 2007
• Pension liabilities increase to 61% of total market capitalisation, up from 21% at the end of 2007
• Pension expense likely to increase in 2009
• Weakened corporate balance sheets could reduce capital spending, affect loan covenants and credit ratings
• Combination of significant deficits and weakened corporates will pose challenging funding requirements for trustees

The chaos that has been observed in the world’s financial markets over the last 12 months has had a major adverse impact on Irish pension plan funding and will negatively impact corporate earnings in 2009, according to the latest estimates by Mercer. According to Mercer, pension plans sponsored by publicly quoted Irish companies have seen a decline in funded status (the ratio of assets to liabilities) from 90% at year-end 2007 to 61% as of December 31, 2008. This equates to losses of an estimated €5.7 billion over 2008, causing the estimated aggregate deficit at the end of 2007 of €1.9 billion to increase to €7.6 billion at the end of 2008.

The majority of Irish companies have their financial year-ends at December 31, therefore the decline in funded status will be capitalised and reflected in corporate balance sheets for many companies. This will reduce balance sheet strength, which leads to consequences for several areas of the business, including capital expenditure decisions, loan covenants and credit rating decisions.

The 65% fall in the ISEQ index over 2008 is an indication of how the market value of Irish companies has deteriorated over the year. At the same time pension liabilities have been relatively stable over the same period (see Figure 2 below). Pension liabilities were valued at 61% of the ISEQ companies total market capitalisations at December 31, 2008, up from 21% at December 31, 2007 meaning that pension plan obligations are now likely to be one of the main financial risks for ISEQ companies.

Additionally, the pension expense that companies report in their financial statements is likely to be significantly higher in 2009, reducing corporate profitability and reported 2009 earnings.

“It is generally accepted that the vast majority of plans now fail to meet the minimum statutory test for Irish Pension Schemes*. While it is difficult to set a reasonable estimate for the absolute level of contributions that will be required in 2009 and beyond, companies are likely to have to make significant additional contributions to correct this situation”, said David O’Sullivan of Mercer’s Financial Strategy Group. “This is of course exacerbated by the fact that many companies are experiencing difficulties themselves and may not be able to afford the contributions required.”

“The combined impact of the deterioration in funded status and the fall in value of Irish companies should prompt pension plan sponsors and trustees to evaluate the strategies of their pension plans. This is particularly important in the Irish legislative environment where there is no obligation on an employer to meet the plan deficit on wind-up” concluded O’Sullivan.

* The Minimum Funding Standard is the statutory basis that is used to determine the position of the scheme in event of wind up and dictates the minimum level of employer contributions to be paid to defined benefit pension plans.