Low interest rates continue to create significant challenges LCP Ireland Pensions Accounting Briefing 2017 Low interest rates continue - a new norm or the calm before the storm? For further information, please contact Conor Daly in our Dublin office, or alternatively the person who normally advises you. For further copies of the briefing, please download a copy from our website at www.lcpireland.com, contact us on +353 (0)1 614 4393 or email [email protected]. This briefing may be reproduced in whole or part, without permission, provided prominent acknowledgement of the source is given. The briefing is not intended to be an exhaustive analysis of companies’ accounting disclosures. Although every effort is made to ensure that the information in this briefing is accurate, Lane Clark & Peacock Ireland Limited accepts no responsibility whatsoever for any errors, or the actions of third parties. Information and conclusions are based on what an informed reader may draw from each company’s annual report and accounts. None of the companies have been contacted to provide additional explanation or further details. View a full list of our services at www.lcpireland.com. © Lane Clark & Peacock Ireland Limited November 2017 2 LCP Ireland Pensions Accounting Briefing — 2017 Contents 5 13 Introduction LCP’s analysis of pension accounting 6 disclosures Executive summary 23 Appendices 9 Developments in Irish pension provision in 2017 LCP Ireland Pensions Accounting Briefing — 2017 3 1.5. IntroductionFCA review continued Just as trustees and employers have started to get to grips with low bond yields, we have potential new legislation and accounting rules to again focus attention on the onerous obligations that come with a defined benefit scheme. Conor Daly Partner 4 4 LCP IrelandLCP PensionsIreland Pensions Accounting Accounting Briefing Briefing — 2017 — 2017 1. Introduction Pension disclosures are a significant element of many company accounts. By analysing these disclosures, we aim to measure the exposure of companies to their pension liabilities and highlight the steps that companies are taking to address pension issues in these challenging times. This briefing covers 15 of the largest companies (by market capitalisation) listed on the Irish Stock Exchange (ISEQ) and other exchanges that have defined benefit pension arrangements in Ireland. All of these companies are required to report under International Accounting Standards (IAS19 for pension costs) in accordance with EU regulations. 15 We have also covered 11 semi-state/state-controlled companies with Number of companies defined benefit pension schemes that have published pension accounting listed on the ISEQ and information for their 2016 financial year. These bodies have reported other exchanges included in this briefing. under IAS19 or the equivalent local standard FRS102 for accounting years 11 beginning on or after 1 January 2015. Number of semi- The information and conclusions in this report are based solely on a state/state-controlled detailed analysis of the information companies have disclosed in their companies included in annual report and accounts for their 2016 financial year and other this briefing. publicly available information. We did not approach companies or their advisers for additional information. LCP Ireland Pensions Accounting Briefing — 2017 5 2. Executive summary Pension deficits remain very high Pension scheme deficits Jan 2016 Pension scheme deficits remained extremely high and volatile over 2016. We estimate that the combined deficit was€3.6bn at €2.6bn 31 December 2016. This represents an increase of €1bn from the estimated position at the start of the year. Dec 2016 The increase in estimated deficits occurred despite some significant once-off gains reported by a number of companies €3.6bn (due to liability management exercises, etc) and occurred primarily due to falls in bond yields over 2016. Oct 2017 Long dated Eurozone bond yields were very volatile over 2016 with a sharp fall in the period to 30 September before somewhat €3.3bn of a reversal in the last quarter. Bond yields have remained volatile over 2017 but have eased slightly further and we estimate the deficit for companies analysed has fallen to €3.3bn by 31 October 2017. While any reduction in the deficit is to be welcomed, the quantum of deficits disclosed for many companies are likely to still be a cause for some considerable concern. Funding levels remain stubbornly low The average funding level has remained stubbornly low since the 2007-2009 financial crisis. The average pension scheme funding level disclosed in 2010 annual reports was 86% compared to an average funding level of 85% disclosed in the 2016 annual reports. This is despite a reported €9.6bn in contributions paid to schemes analysed over the period 2010-2016 and very strong stock market performance over the same period. The main reason for funding levels remaining stubbornly low has been the sharp and prolonged fall in Eurozone bond yields over the same period. Pensions scheme liabilities are valued by reference to bond yields so when bond yields fall, the value of reported liabilities rise. Pension contributions remain a significant cost Total contributions paid The companies analysed paid substantial contributions, 2014 over €1.07bn, to their pension schemes in 2016. This follows €1.27bn contributions of €1.16bn in 2015 and €1.27bn in 2014. It is clear that pensions remain one of the most significant costs for these organisations. 2015 In many cases, the employer contributions were significantly €1.16bn higher than the cost of accrual as attempts continue to eliminate past service deficits. 2016 €1.07bn 6 LCP Ireland Pensions Accounting Briefing — 2017 2. Executive summary continued What have companies been doing Some divergences in assumption to manage their pension liabilities? setting Many companies have carried out pension The value placed on pension liabilities is liability management exercises over the year. very dependent on market conditions at the In some cases the accrued benefits for existing valuation date and the assumptions used in the members were cut following agreement with valuation exercise - particularly the discount rate. As pension liabilities tend to be very long the pension scheme trustees (Bord na Mona) term, a small change in the discount rate can while in others (Kerry Group) the Irish scheme was closed for all future accrual. have a very significant impact on the disclosed balance sheet liability. There were also a number of examples of transfer value exercises where members were We have seen evidence of some divergence offered transfers values to another pension in the assumptions adopted by companies arrangement in exchange for their accrued as different interpretations are taken of the appropriate market yield at the valuation date. defined benefitsKerry ( Group, Smurfit Kappa, UDG Healthcare). Equity holdings remain relatively high The average allocation to equities for the companies analysed fell from 43% to 41% over the year. This is consistent with the trend seen in recent years with the overall allocation to equities down 24% over the last nine years of our reporting. However, while there are some notable exceptions, the overall 41% proportion of Irish scheme assets in equities (41%) remains high Average equity when compared to other jurisdictions. For example, defined allocation in benefit pension schemes operated by FTSE 100 companies in the Irish survey UK now hold on average just 26% of their assets in equities.1 26% Average allocation in While the prevailing low bond yields are no doubt a contributory (UK) LCP Accounting factor in the reluctance to switch from equities to bonds, it would for Pensions 2017 be most regrettable if trustees continue to feel obliged to take survey. risks with undue equity exposure to seek outperformance in order to deliver members’ benefits. 1 (UK) LCP Accounting for Pensions 2017 LCP Ireland Pensions Accounting Briefing — 2017 7 1.5. IntroductionFCA review continued While the proportion of assets held in equities continues to fall, it is still noticeably higher (41%) for the schemes analysed in this report compared to the average equity holding across all Irish defined benefit pension schemes (32.5%), as reported by the Pensions Authority in August 2017. On the face of it, this suggests the larger schemes may be taking more investment risk than the average scheme. Roma Burke Partner 8 8 LCP IrelandLCP PensionsIreland Pensions Accounting Accounting Briefing Briefing — 2017 — 2017 3. Developments in Irish pension provision in 2017 3.1. Pension reform is on the political agenda The Minister for Social Protection signalled potentially important changes to the pensions landscape at the Pensions Authority Conference on 2 March 2017. In particular, it was proposed that sponsoring employers should be required to give a minimum of 12 months' notice to trustees to cease contributions, irrespective of the provisions included in the Scheme Trust Deed & Rules. However, the subsequent Social Welfare, Pensions & Civil Registration Bill 2017 which was published in July 2017, dropped the majority of the proposed changes including the proposal for mandatory wind up notice periods. Indications are that the Government intends to reintroduce these provisions at a later stage. These provisions, if implemented, would provide for much stronger protections for members of defined benefit schemes, but also expose many employers to potentially significant additional contribution