LCP IRELAND PENSIONS ACCOUNTING BRIEFING 2015

Transcription

1 LCP IRELAND PENSIONS ACCOUNTING BRIEFING 2015 In an environment of historically low bond yields, defined benefit pension schemes continue to have a significant impact on company balance sheets. This report looks at how Irish companies are facing up to these challenges. Lane Clark & Peacock Ireland Limited Trustee Consulting Investment Consulting Corporate Consulting Insurance Consulting Business Analytics

2 2 We would like to thank those from LCP who have made this briefing possible: Roma Burke Fergus Collis Conor Daly David Fink Martin Haugh John Lynch Eoin Mullen Mick O Byrne Charlotte Quarmby Orla Quigg For further information, please contact Conor Daly, Martin Haugh, John Lynch or Roma Burke 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 contact us on +353 (0) or enquiries@lcpireland.com. 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 IAS19 or FRS17. 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 Lane Clark & Peacock Ireland Limited November 2015

3 3 LCP Ireland Pensions Accounting Briefing 2015 p5 1. Introduction p6 2. Executive Summary p Contributions remain a significant part of scheme deficit funding p Low bond yields continue to have an impact p Pension Scheme restructures continue p Equity holdings remain relatively high p Funding Standard Reserve p8 3. Developments in Irish pension provision in 2014/15 p Pension risk ranks highly on the corporate agenda p The Funding Standard Reserve p14 4. LCP s analysis of pension accounting disclosures p Introduction p Reported funding levels p Development of pension scheme deficits during 2015 p Company exposure to pension schemes p Contributions compared to benefits earned p Trends in asset allocations p Key assumptions p26 Appendix 1 Accounting disclosure listing p28 Appendix 2 Accounting Risk Measures

4 4 Martin Haugh Partner It is encouraging to see that schemes continue to diversify their performance assets. Diversification is one of the main de-risking tools available to schemes that at present cannot afford to increase bond holdings.

5 LCP Ireland Pensions Accounting Briefing Introduction 5 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 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. We have also covered 11 semi-state/state-controlled companies with defined benefit pension schemes that have published pension accounting information for their 2014 financial year. These bodies have reported under IAS19 or the equivalent local standard, Financial Reporting Standard 17 (FRS17) now called FRS102. Introduction The information and conclusions in this report are based solely on a detailed analysis of the information companies have disclosed in their annual report and accounts for their 2014 financial year and other publicly available information. We did not approach companies or their advisers for additional information.

6 6 LCP Ireland Pensions Accounting Briefing Executive Summary 1.27bn The total contributions paid by the sponsoring employers analysed into their pension schemes in bn The combined funded pension scheme deficit of the companies analysed is estimated to be 5.8bn at 31 December Contributions remain a significant part of scheme deficit funding The companies analysed paid substantial contributions, over 1.27bn, to their pension schemes in It is clear that pension schemes remain one of the most significant costs for these organisations. In many cases, the employer contributions were significantly higher than the cost of accrual as attempts continue to eliminate past service deficits Low bond yields continue to have an impact The value placed on pension scheme liabilities increases when bond yields fall and the impact of falling bond yields on balance sheets can be very dramatic. Bond yields fell significantly over 2014 and this had a corresponding negative impact on balance sheets. Funding levels fell on average despite very positive investment performance. LCP estimates that the combined Irish net accounting deficit of funded pension schemes for the companies analysed was 5.8bn in December The downward trend in bond yields continued unabated into 2015 with German 10 year bond yields falling to almost 0% by April Since April, there has been somewhat of a reversal with yields on high grade Eurozone corporate bonds moving slightly higher than 1 January 2015 levels at the date of publication of this report Pension Scheme restructures continue The closure and restructure of defined benefit pension schemes continued during 2014 as companies struggled with the increased cost of providing defined benefit pensions as well as the associated balance sheet volatility. Examples of significant changes implemented include: Ryanair made a final contribution of 12.5m into its Irish defined benefit plan during the accounting year representing a full and final settlement of the company s liability to contribute to the defined benefit plan. The plan was subsequently wound up. Bank of Ireland carried out further amendments to its defined benefit pension schemes during the year to address the deficit. The hybrid pension scheme (which included elements of defined benefit and defined contribution) was closed to new entrants and a new defined contribution scheme was introduced for new entrants to the Group from that date. The

7 LCP Ireland Pensions Accounting Briefing Executive Summary 7 Group also implemented a number of amendments to benefits to address the deficit including amendments on the future increases to pensions in payment and pensionable salaries. Irish Continental Group also implemented changes to its main defined benefit pension scheme during the year. Under the terms of the agreement with the trustees, the liabilities of the scheme were reduced by the replacement of guaranteed pension increases for some members of the scheme with discretionary pension increases linked to the funding of the scheme Equity holdings remain relatively high The average equity asset allocation for the companies analysed fell slightly from 49% to 45% over the year. While there are some notable exceptions, the overall proportion of Irish scheme assets in equities (45%) remains high when compared to other jurisdictions. For example, defined benefit pension schemes operated by FTSE 100 companies in the UK now hold on average just 30% of their assets in equities 1. When compared internationally, Irish pension schemes still have a significantly higher allocation to equities than in other jurisdictions Executive Summary The prevailing low bond yields are no doubt a contributory factor in the overall reluctance of trustees to switch significantly from equities to bonds. However, there is some evidence of the trend seen in recent years of increased allocation to lower volatility asset classes (e.g. diversified growth funds) with 19% on average of assets now classified as other (i.e. neither equities or bonds). However, overall, the relatively high level of equity allocation remains when compared to other jurisdictions. In that context, it would be most regrettable if trustees remained overly reliant on equity outperformance in order to deliver members benefits Funding Standard Reserve From 1 January 2016, all funded defined benefit schemes will be required to hold a reserve over and above the statutory minimum funding standard liability. The reserve differs from scheme to scheme and the level of the reserve will largely depend on the proportion of assets deemed risky from a regulatory perspective. The risk reserve requirement is likely to be another driver for a reduction in equity holdings from 2016 and beyond. Fergus Collis Senior Consultant 2016 is fast approaching - the Funding Standard Reserve will now start to become a real consideration for schemes. 1 (UK) LCP Accounting for Pensions 2015

8 8 Content p8 3. Developments in Irish pension provision 2014/15 p Pension risk ranks highly on the corporate agenda p The Funding Standard Reserve

9 Roma Burke Partner The Irish pension schemes analysed hold 50% more equities than their UK counterparts. This represents a significant risk to corporate balance sheets. Developments in Irish pension provision 2014/15

10 10 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2014/ Pension risk ranks highly on the corporate agenda Under current accounting standards, companies are already required to disclose details of the risks associated with their pension schemes in their accounts. However, from October 2015, additional reporting requirements will come into force under an updated version of the UK Corporate Governance Code this code applies to Irish incorporated companies that are listed on the Main Securities Market (MSM) of the Irish Stock exchange and operates on a comply or explain basis. The updated code will require the directors of companies listed on the MSM to confirm that they have carried out a robust assessment of the main risks facing their business, including those that would threaten its solvency. Furthermore, there is a new requirement to include a viability statement in the annual accounts, confirming whether the directors expect the company will be able to continue in operation, taking into account its current position and principal risks. Pension risk will be one of the main risks faced by companies with significant defined benefit pension schemes. We expect that the new requirement will increase the level of pension risk assessment and disclosure, and we have already seen evidence of some organisations taking steps to report this to their shareholders. For example, in its 2014 report, Bank of Ireland identifies and comments in depth on 9 key risks that face the Group, with pension risk being ranked alongside credit, liquidity, market, regulatory and reputational as one of the key risks. The report outlines that while pension risk is mitigated through significant changes to the pension benefit structure (including the introduction of a defined contribution scheme for new employees from 2014), additional pension contributions and a move to reduce interest rate exposure and volatility (by transferring 20% of the listed equity portfolio to bonds during 2014), the pension funds are still subject to risks which may impact on the Group s capital ratios. In a similar vein, AIB notes that while it has taken steps to reduce the risk posed by its pension arrangements, there continues to be a level of volatility associated with pension funding. Their report comments that the ability of the schemes to meet the benefit payments is managed by the trustees through dynamic diversification of the investment portfolios across geographies and asset classes. Additionally, following the closure of the schemes to future accrual, the trustees have commenced a process to de-risk the investment strategy to reduce market risk.

11 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2014/15 11 Aryzta identifies the major risks posed by the pension arrangements as; asset volatility, changes in bond yields, inflation risk and longevity risk and reports that the Group manages their pension investment positions using an asset-liability matching framework. Under this framework, the objective is to match assets to the pension obligations by investing in long-term fixed interest securities which match the benefit payments due The Funding Standard Reserve Under the Pensions Act, defined benefit schemes are required to report regularly (at least once every three years) on their assets and liabilities assessed by reference to the Funding Standard. Where a scheme does not have sufficient assets to meet its liabilities, a funding proposal (effectively a recovery plan) agreed by the sponsor and trustees is required to be submitted to the Pensions Authority for approval. From 1 January 2016 a higher bar applies; pension schemes must now hold sufficient assets not just to meet their statutory liabilities, but also to meet the Funding Standard Reserve. This reserve is intended to act as a buffer against adverse market experience and varies from scheme to scheme. The level of the buffer broadly depends on: The proportion of cash and high grade bonds held by the scheme; the higher the proportion, the lower the buffer; and The amount by which the funding position would deteriorate if interest rates fell by 0.5%. While schemes have been reporting on this reserve requirement for a number of years now, 2016 will mark the first year where it becomes a requirement for all schemes to fund for it. It is notable that in its 2014 review, the Pensions Authority remarked that 41% of all current and frozen defined benefit schemes did not have sufficient assets to meet the statutory funding standard. Delving into the Pensions Authority report further, it notes that just 18 of the 50 largest schemes in the country (36%) met the funding standard in This suggests that the introduction of this new requirement may pose considerable additional challenges for trustees and sponsors in the coming years and may inevitably lead to pressure for further benefit curtailments. Developments in Irish pension provision 2014/15

12 12 Content p14 4. LCP s analysis of pension accounting disclosures p Introduction p Reported funding levels p Development of pension scheme deficits during 2015 p Company exposure to pension schemes p Contributions compared to benefits earned p Trends in asset allocations p Key assumptions

13 Conor Daly Partner Despite very strong asset performance during 2014, it is clear that many pension schemes remain under considerable pressure from low bond yields. We therefore expect to see measures to reduce deficits such as scheme closures, transfer exercises and limitations on future increases to continue into LCP s analysis of pension accounting disclosures

14 14 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 4.1. Introduction We have analysed the financial position of 26 companies defined benefit pension schemes. A full list of the companies can be found in Appendix 1. In the 2014 LCP Ireland Pensions Accounting Briefing, we took the 30 largest companies (by market capitalisation) on the ISEQ and analysed the 12 companies with material defined benefit pension arrangements. Continuing market challenges means that the fortunes of many companies have continued to evolve and in a trend that was seen in previous LCP reports, the largest Irish companies now include more companies that operate defined contribution schemes only. This year, of the top 30 companies in the ISEQ analysed, only 11 organisations reported material defined benefit pension liabilities. Ryanair does not appear this year as their defined benefit pension scheme was wound up. As a result, comparative figures provided for 2013 may differ from those provided in last year s report. In a similar manner to previous years, we have also included DCC, Grafton, Greencore and United Drug (these companies are listed on other exchanges, but operate significant defined benefit pension schemes in Ireland) and analysed the largest pension schemes for semi-state/statecontrolled companies that publish accounts. We have reported on the financial position of the defined benefit pension arrangements sponsored by these companies and, where possible, we have excluded liabilities relating to post-retirement healthcare from our analysis. The figures analysed include all defined benefit pension arrangements (including overseas arrangements, if applicable), except where indicated. 83% The average funding level (assets as a proportion of funded liabilities) for the companies analysed was 83% in Reported funding levels The accounting standards look at the pension scheme assets and funded liabilities at the accounting date. Of the companies analysed in this survey, only one reported that it had sufficient assets to meet its funded liabilities (Kingspan). Kingspan disclosed the highest funding level (107%), while two organisations (Coillte and Central Bank) disclosed funding levels of less than 70%. The average funding level for the schemes analysed fell from 86% in 2013 to 83% in The following chart shows how funding levels have changed over the year for the companies analysed.

15 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 15 Number of companies Ratio of assets to accounting liabilities - funded schemes( %) under 70% 70% - 79% 80% - 89% 90% - 99% over 100% This general fall was due to the fall in yields on high quality corporate bonds (used to place a value on the accounting liabilities) in The deterioration in funding levels would have been greater if it had not been for the strong rise in scheme assets (equities and bonds) in Development of pension scheme deficits during 2015 We have also considered the movement in the pension scheme balance sheet positions during On the asset side, global equity markets rose during 2015 before falling sharply during the third quarter against a background of signs of weakening economic growth in China, which has been an engine for economic growth over the last decade, and uncertainty about the timing of when the U.S. Federal Reserve would increase interest rates. On the liability side, while there has been some considerable volatility over 2015, bond yields as at the end of August were about 0.30% pa higher on average than as at the end of These higher yields mean that IAS19 liability values have decreased during 2015 (as pension scheme liabilities are calculated by reference to these yields for accounting purposes) and provided some respite against the continued increase in pension liabilities in recent years. LCP estimates that the aggregate pension deficit for the Irish funded schemes of the companies analysed stood at 5.6bn as at 31 August 2015 ( 5.8bn at 31 December 2014). LCP s analysis of pension accounting disclosures

16 16 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Projected aggregate pension deficit 0 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15-2 Surplus / Deficit bn State-owned companies ISEQ listed companies -12 Source: LCP Ireland's Accounting for Pensions report 2015 Note: all data is at month end. Data is for the Irish pension arrangements of the companies analysed and has been estimated from the pensions disclosures in their published company accounts. As the graph demonstrates, there can be significant volatility in the level of deficits from month to month as equity values and bond yields fluctuate. Indeed, when bond yields fell to the lowest point in April 2015, it is estimated that the aggregate pension deficit exceeded 10bn.

17 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Company exposure to pension schemes Accounting liabilities (funded) as a proportion of market capitalisation (%) 7 Number of companies under 5% 5% - 14% 15% - 24% 25% - 49% The chart above shows the size of the pension accounting liabilities relative to market capitalisations for the companies analysed (AIB has been excluded from this analysis as its disclosed market capitalisation is distorted by the limited amount of stock actively traded). The total pension liability, expressed as a proportion of market capitalisation, fell slightly over the year (from 27% in 2013 to 26% in 2014). 50% - 74% 75% + 26% The total funded pension scheme liabilities expressed as a proportion of market capitalisation for the companies analysed was 26%. The following lists the companies with the largest pension scheme liabilities expressed as a percentage of their market capitalisation at their 2014 year-end dates: Bank of Ireland: 74% (77% in 2013) Greencore: 54% (87% in 2013) Smurfit Kappa: 51% (45% in 2013) 4.5. Contributions compared to benefits earned We have analysed how the employer contributions compare with the expected cost of benefits earned: The cost of benefits earned under IAS19 is determined by the assumptions at the start of the accounting year. LCP s analysis of pension accounting disclosures Typically, employer contributions are set following recommendations by the Scheme Actuary and are designed to ensure that there are sufficient assets to meet benefit payments as they fall due. Our analysis of the accounting disclosures shows that the vast majority of companies pay contributions that are in excess of the cost of benefit accrual under IAS19 as attempts are made to reduce past service deficits. On average, companies paid contributions of just over 2.2 times (2013: 2.7 times) the cost of benefit accrual on the accounting basis.

18 18 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures The contributions made by C&C Group and DCC were over 4 times the cost of benefit accrual under IAS19. FBD, Central Bank and NTMA paid contributions that were less than the estimated cost to cover benefits earned during the year on the accounting basis. Employer contributions compared to benefits earned 6 45% The average equity allocation for the pension schemes analysed fell during This is still significantly higher than pension schemes in other jurisdictions. Number of companies <100% <150% <200% <250% <300% <350% >350% Ratio of contributions paid to benefits earned (%) 4.6. Trends in asset allocations The level of exposure to equities fell from 49% in 2013 to 45% in The allocation to bonds increased from 34% to 36% and the allocation to other asset classes increased from 17% to 19%. The average split of assets for the pension schemes analysed is shown in the following chart Asset allocation 19% 45% Equity Bond Other 36% Companies who reported the highest equity holdings were Grafton (70%), Kerry Group (63%) and Coillte and United Drug (60%). On the opposite end of the spectrum, AIB held 25% in equities while C&C Group held 28%. The Pensions Authority has commented that investment strategies which rely on equities to outperform bonds in order to meet pension scheme liabilities entail considerable risk, which, in their view, will fall especially on the younger members of the schemes. To address this, the Authority

19 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 19 has said that it intends to raise this matter directly with pension scheme trustees as part of a programme of increased direct contact. There is evidence that a number of trustee boards are continuing to actively review their investments and in many cases implement de-risking strategies. We expect this trend to continue as many schemes review their asset strategies as part of their recent funding proposals. The shift from equities is particularly evident at an individual company level with some accounts showing significant falls in equity allocations during 2014: Ornua: (formerly Irish Dairy Board): equity holding reduced from 83% to 56% Kingspan: equity holding reduced from 70% to 58% Bank of Ireland: equity holding reduced from 44% to 32% Some companies reported increases in equity holdings and this may be partly due to very strong equity performance during For example C&C Group reported an increase in its equity holding of 4%, while Ervia (formerly Bord Gais), Smurfit Kappa and DCC reported an increase of 3% over In previous years we reported that Irish pension schemes had higher than average allocations to equities when compared to other jurisdictions. Our current analysis would continue to support this assertion. For example, in the UK, approximately 30% 2 of pension scheme assets were allocated to equities at the 2014 year end compared with 45% for the Irish schemes in this report. The trend seen in recent years of an increase in the allocation to assets classified as other (i.e. neither equities nor bonds) has continued with such assets now representing on average 19% of overall asset holdings. Such assets would include investments in diversified asset investment funds, hedge funds and alternative asset classes. The increased allocation to such assets is evidence of trustees taking steps to diversify their portfolio and reduce volatility. Investments in Liability Driven Investment (LDI) arrangements would also be included under this heading such arrangements would employ the use of derivatives as a means of seeking returns while reducing interest rate risk. LCP s analysis of pension accounting disclosures 4.7. Key assumptions We consider below the various assumptions used to place a value for accounting purposes on pension benefits. Where a company operates pension schemes in more than one country, we have considered the assumptions used for Ireland or the Eurozone (if available). Where a company has disclosed a range of assumptions, we have used our judgement to estimate the relevant point in the range for an Irish pension scheme. 2 (UK) LCP Accounting for Pensions 2015.

20 20 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Discount rates The discount rate is the key assumption used to value pension liabilities. Under IAS19 and FRS17, this assumption is based on the yields available on long-dated high quality (typically AA rated) corporate bonds in the currency of the liability at the valuation date. The yields on high quality corporate bonds, and hence the discount rates, will fluctuate from day to day in line with market conditions. In the following chart, we have analysed companies reporting with December 2014 year-ends. As this shows, there was a significant fall in the discount rates disclosed compared to last year. Discount rates used at 31 December (% pa) 10 Number of companies % 2.1% 2.3% 2.5% 2.7% 2.9% 3.1% 3.3% 3.5% 3.7% 3.9% 4.1% 2.2% pa The average discount rate adopted by the companies in this report fell from 3.8% in 2013 to 2.2% in The majority of the companies analysed disclosed a discount rate in the range 2.0% - 2.2% pa. The average discount rate for companies reporting at 31 December 2014 was 2.2% pa a significant fall from the average discount rate of 3.8% pa as at 31 December 2013 and reflecting the commensurate fall observed in corporate bond yields over Adopting a lower discount rate will increase the liabilities, while a higher discount rate will decrease the liabilities. The highest discount rates were disclosed by Kingspan (1.5%-3.6%), Central Bank (2.35%), NTMA (2.3%) and VHI (2.3%). The extent of the impact of the choice in discount rate will depend on the liabilities valued. For example, Coillte reported that a decrease of 1% pa in the discount rate (from 2.2% pa to 1.2% pa) would increase the Coillte pension scheme liabilities by c. 67m (or 17%) at the accounting date. Similarly, a decrease of 1% in the discount rate used by FBD (from 2.2% pa to 1.2% pa) would increase the pension scheme liabilities by 53m (or 27%). Life expectancy All of the companies analysed have disclosed some information about the life expectancy assumption.

21 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 21 The following chart shows the range of life expectancies for males and females assumed by the companies analysed for members retiring at the balance sheet date in Life Expectancy assumption Individuals aged 65 on accounting date Number of companies Male Female Age at death (rounded to nearest age) The average assumption was that male members who retire at age 65 at the accounting date would live to age 86.8 (88.9 for females). After several years of increases in the average life expectancy, our 2014 survey indicates that the average life expectancy for males aged 65 at the accounting date has fallen slightly from the 2013 survey. This is consistent with the results of a 2014 Society of Actuaries investigation into the mortality experience of self-administered pension schemes in Ireland. However, this overall average hides some changes where some companies increased their assumed life expectancy and others decreased their assumption. Greencore increased the life expectancy for a male aged 65 by 1 year. C&C Group and Diageo increased it by 0.2 of a year. However, FBD, United Drug, Grafton and CIE disclosed reductions in their assumed life expectancy for a male aged 65 of between 1.5 and 1.8 years. An increase in the assumed life expectancy will result in an increase in the value of the liabilities. An increase of 1 year will broadly lead to an increase of approximately 4% in companies disclosed pension liabilities. LCP s analysis of pension accounting disclosures Future improvements in life expectancy As well as setting assumptions to estimate how long current pensioners will live on average, companies must also decide how quickly life expectancies for future pensioners will increase as a result of improvements in mortality.

22 22 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Allowing for future improvements will increase pension scheme liabilities and, as a result, deficits on the balance sheet. The majority of companies analysed disclosed sufficient information in their accounts to determine the allowance they were making for future improvements in mortality. On average, the companies analysed are assuming that, over the next 20 years, the life expectancy of male retirees will increase by approximately 2.3 years. This represents a small decrease to the assumptions made by the companies last year. Long term inflation While there are some uncertainties when setting the inflation assumption and a number of approaches are available, the average inflation assumption disclosed by companies reporting at 31 December 2014 was 1.6%. This compares to an average of 2.0% disclosed at 31 December This fall is consistent with the market s inflation expectations taken as the difference between the real and nominal yields on long dated Eurozone Government bonds.

23 Mick O Byrne Senior Consultant Evidence suggests that companies are engaging in liability management exercises (such as enhanced transfer value exercises) to remove balance sheet risk. LCP s analysis of pension accounting disclosures

24 24 Content p26 Appendix 1 Accounting disclosure listing p28 Appendix 2 Accounting Risk Measures

25 John Lynch Partner Transferring liabilities to insurance companies (buy-out) is the ultimate way to de-risk. We expect that when bond yields rise and buy-out becomes more affordable, the demand will increase. Schemes should prepare for this now.

26 26 LCP Ireland Pensions Accounting Briefing 2015 Appendix 1: Accounting disclosure listing This table shows the key disclosures made by the companies included in our analysis. The source of the data is each company s annual report and accounts for the accounting period ending in The market value of assets and surplus/(deficit) figures relate to the worldwide position of each company, not just the Irish schemes. All figures are rounded to the nearest million Euros. The assumptions for the discount rate and price inflation refer to those disclosed for the companies main Irish or Eurozone schemes where available. We have excluded from our survey companies who had no evidence of significant defined benefit provision. Some companies 2013 figures have been restated Surplus/(deficit) 2013 Surplus/(deficit) Company Year-end Market value of assets Total Funded schemes Discount rate Inflation Market value of assets Total Funded schemes m m m % pa % pa m m m Irish Companies Aryzta AG Jul 131 (12) (11) 3.25% 2.14% 145 (22) (19) Bank of Ireland Dec 6,539 (986) (986) 2.20% 1.50% 5,412 (841) (841) C&C Group plc Feb 171 (21) (21) % 2.00% 161 (22) (22) CRH Dec 2,046 (711) (635) 2.00% 1.75% 2,314 (410) (349) DCC Mar 126 (19) (19) 3.40% 2.00% 117 (23) (23) Diageo Jun 9,338 (590) (293) 3.00% 1.50% 8,262 (625) (346) FBD Holdings plc Dec 141 (54) (54) 2.20% 1.50% 130 (29) (29) Glanbia Dec 393 (115) (115) 2.10% % 346 (78) (78) Grafton Dec 242 (42) (42) 2.10% 1.30% 217 (9) (9) Greencore Sep 506 (166) (166) 2.30% 1.65% 445 (164) (164) Irish Continental Dec 257 (24) (24) 2.00% 1.50% 231 (37) (37) Kerry Group plc Dec 1,195 (473) (447) % 1.30% 1,005 (252) (231) Kingspan Dec 72 (12) % 2.00% 61 (8) 6 Smurfit Kappa Dec 1,889 (893) (337) 1.95% 1.50% 1,625 (713) (226) United Drug Sep 81 (6) (6) 3.00% 1.75% 67 (5) (5)

27 LCP Ireland Pensions Accounting Briefing 2015 Appendix 1: Accounting disclosure listing Surplus/(deficit) 2013 Surplus/(deficit) Company Year-end Market value of assets Total Funded schemes Discount rate Inflation Market value of assets Total Funded schemes m m m % pa % pa m m m State controlled bodies AIB Dec 6,007 (1,064) (1,064) 2.20% 1.75% 5,242 (94) (94) An Post Dec 2,599 (440) (420) 2.20% 1.75% 2,197 (229) (214) Bord na Mona Mar 284 (43) (39) 3.00% 1.50% 272 (59) (54) Central Bank of Ireland Dec 568 (286) (286) 2.35% 2.00% 531 (85) (85) CIE Dec 1,761 (702) (702) 2.10% 1.60% 1,538 (418) (418) Coillte Dec 259 (142) (142) 2.20% 1.50% 224 (130) (130) Ervia (formerly Bord Gais) Dec 365 (85) (85) 2.20% 1.50% 320 (49) (49) Irish Aviation Authority Dec 451 (151) (151) 2.25% 1.50% 392 (130) (130) Ornua (formerly Irish Dairy Board) Dec 133 (51) (51) 2.10% 1.75% 117 (26) (26) NTMA Dec 98 (26) (26) 2.30% 1.50% 76 (4) (4) VHI Dec 200 (19) (19) 2.30% 1.30% 169 (39) (39) This briefing analyses 11 companies of the largest 30 companies on the Irish Stock Exchange with defined benefit pension arrangements. Company size has been determined by the weighting on the Irish Stock Exchange benchmark index at 31 December The briefing also analyses the most significant state owned/controlled companies/bodies (where accounts were available) and 4 public companies that are listed on other exchanges but who operate significant defined benefit pension schemes in Ireland (DCC, Grafton, Greencore and United Drug). The 2014 figures are as at the end of the accounting periods ending in The 2013 figures are as at the start of the accounting period. All figures shown were taken from pensions accounting disclosures. We have converted the figures provided in pounds sterling in the DCC, Diageo, Grafton and Greencore accounts using the Euro conversion rate applicable at each company s yearend (DCC: at 31 March 2014 (2013: 1.184), Diageo: at 30 June 2014 (2013: ), Grafton: at 31 December 2014 (2013: ), Greencore: at 26 September 2014 (2013: ))

28 28 LCP Ireland Pensions Accounting Briefing 2015 Appendix 2: Accounting Risk Measures The tables show the key results of analysis of the 2014 accounting disclosures made by the largest companies on the Irish Stock Exchange, the largest state-controlled companies/bodies with defined benefit pension arrangements and four other companies who operate significant defined benefit pension schemes in Ireland (DCC, Grafton, Greencore and United Drug). The pension figures relate to the worldwide position of each company (not just their Irish pension schemes) but exclude healthcare and defined contribution pension arrangements where possible. The source of the data is each company s annual report and accounts for the accounting period ending in Figures provided in company accounts in sterling have been converted to Euro using the conversion rates outlined in Appendix 1. The surplus/(deficit) figures are before allowing for deferred tax. Traditionally some companies with overseas pension schemes do not fund them via an external scheme, instead backing the pension scheme with company assets, which may result in a larger total deficit being disclosed. The source of market capitalisation figures is the Irish Stock Exchange weightings as at the companies year-ends. All figures shown have been calculated using unrounded numbers. Therefore some metrics shown may differ from those calculated using the rounded figures. Largest funded liabilities Name 2014 Liabilities m 2013 Liabilities m Diageo 9,631 8,608 Bank of Ireland 7,525 6,253 AIB 7,071 5,336 An Post 3,020 2,411 CRH 2,681 2,663 Largest funded deficits Name 2014 Deficit m 2013 Deficit m AIB 1, Bank of Ireland CIE CRH Kerry Group plc Largest funded liabilities compared to market capitalisation 2014 Name Liabilities m Market cap m Liabilities/ Market cap % Bank of Ireland 7,525 10,130 74% Greencore 672 1,255 54% Smurfit Kappa 2,226 4,330 51% FBD Holdings plc % Irish Continental % Largest funded deficits compared to market capitalisation 2014 Name Deficit m Market cap m Deficit/ Market cap % FBD Holdings plc % Greencore 166 1,255 13% Bank of Ireland ,130 10% Smurfit Kappa 337 4,330 8% Kerry Group plc ,030 4%

29 LCP Ireland Pensions Accounting Briefing 2015 Appendix 2: Accounting Risk Measures 29 Highest equity allocation 2014 Equity 2013 Equity Name allocation % allocation % Grafton 70% 71% Kerry Group plc 63% 64% Coillte 60% 64% United Drug 60% 63% Kingspan 58% 70% Lowest equity allocation 2014 Equity 2013 Equity Name allocation % allocation % AIB 25% 31% C&C Group plc 28% 24% CRH 31% 35% Diageo 31% 37% Bank of Ireland 32% 44% Highest (funded) funding level Name 2014 Assets m 2014 Liabilities m Assets/ Liabilities % Assets/ Liabilities % Kingspan % 111% Diageo 9,338 9,631 97% 96% United Drug % 93% Aryzta AG % 88% Irish Continental % 86% Lowest (funded) funding level Name 2014 Assets m 2014 Liabilities m Assets/ Liabilities % Assets/ Liabilities % Coillte % 63% Central Bank of Ireland % 86% CIE 1,761 2,463 72% 79% FBD Holdings plc % 82% Ornua (formerly Irish Dairy Board) % 82% Largest employer contributions Name 2014 Contributions m 2013 Contributions m Diageo Bank of Ireland CRH Smurfit Kappa AIB

30 30 LCP Ireland Pensions Accounting Briefing 2015 Appendix 2: Accounting Risk Measures Largest service cost Name Service cost m Service cost m Diageo Bank of Ireland CRH Smurfit Kappa An Post Largest employer contributions compared to service cost Contributions/ Contributions/ Name Contributions m Service cost m current service cost % current service cost % C&C Group plc % 900% DCC % 501% Kerry Group plc % 243% Irish Aviation Authority % 306% Glanbia % 315% Largest increase in funding level Name 2014 Funding level % 2013 Funding level % Increase in funding level % VHI 91% 81% 12% Irish Continental 91% 86% 6% Bord na Mona 88% 83% 6% Aryzta AG 92% 88% 4% DCC 87% 84% 4%

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32 LCP Ireland Pensions Accounting Briefing 2015 Conor Daly Partner lcpireland.com +353 (0) John Lynch Partner lcpireland.com +353 (0) Martin Haugh Partner lcpireland.com +353 (0) Roma Burke Partner lcpireland.com +353 (0) LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. Lane Clark & Peacock Ireland Limited Dublin, Ireland Tel: +353 (0) enquiries@lcpireland.com Lane Clark & Peacock LLP London, UK Tel: +44 (0) enquiries@lcp.uk.com Lane Clark & Peacock LLP Winchester, UK Tel: +44 (0) enquiries@lcp.uk.com Lane Clark & Peacock Belgium CVBA Brussels, Belgium Tel: +32 (0) info@lcpbe.com Lane Clark & Peacock Netherlands B.V. Utrecht, Netherlands Tel: +31 (0) info@lcpnl.com Lane Clark & Peacock UAE Abu Dhabi, UAE Tel: +971 (0) info@lcpgcc.com Lane Clark & Peacock Ireland Limited is registered in Ireland with registered number The registered Office is Office 2, Grand Canal Wharf, South Dock Road, Dublin 4. LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). Lane Clark & Peacock Ireland Limited is regulated by the Central Bank of Ireland. All rights to this document are reserved to Lane Clark & Peacock Ireland Limited. This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. We accept no liability to anyone to whom this document has been provided (with or without our consent). Lane Clark & Peacock UAE operates under legal name Lane Clark & Peacock Belgium Abu Dhabi, Foreign Branch of Belgium. Lane Clark & Peacock Ireland Limited. Lane Clark & Peacock Ireland Limited Trustee Consulting Investment Consulting Corporate Consulting Insurance Consulting Business Analytics London Winchester Brussels Dublin Utrecht Abu Dhabi