LCP IRELAND PENSIONS ACCOUNTING BRIEFING 2014

Transcription

1 LCP IRELAND PENSIONS ACCOUNTING BRIEFING 2014 Despite an improvement in scheme deficits over 2013, 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 London Winchester Brussels Dublin Utrecht Zürich Basel Abu Dhabi

2 2 We would like to thank those from LCP who have made this briefing possible including Roma Burke, Michael Butler, Fergus Collis, Conor Daly, David Fink, Charlotte Quarmby, Ivy Sze, Tomas Kirrane, Martin Haugh, Alex Waite, David Lane, John Lynch, Mick O Byrne, Jamie Rocke, Aislinn Gribben, Kat Gant and Eoin Mullen. The LCP Ireland Pensions Accounting Briefing provides an authoritative insight into the state of pension scheme funding at some of Ireland s largest pension schemes. LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. For further information, please contact Conor Daly, Martin Haugh, John Lynch or Roma Burke in our Dublin office, or alternatively the partner 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 action which third parties take as a result of this briefing. 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. The information used in this report is based solely on the information disclosed in company s financial accounts. View a full list of our services at All information correct at the time of going to print (November 2014). Lane Clark & Peacock Ireland Limited

3 3 LCP Ireland Pensions Accounting Briefing 2014 p5 1. Introduction p6 2. Executive Summary p Benefit reductions step up a gear p Contributions remain a significant part of scheme deficit funding p Falls in bond yields since year end substantially increase deficits p Scheme asset allocations remain static p Impact of IAS19 Accounting Standard Changes p8 3. Developments in Irish pension provision in 2013/14 p Background p Changes to the Defined Benefit Priority Order p Industrial unrest over pension schemes p Landmark court cases for Defined Benefit pension schemes p Europe proposes revised pension directive p14 4. LCP s analysis of pension accounting disclosures p Introduction p Reported funding levels p Development of pension scheme deficits during 2014 p Company exposure to pension schemes p Contributions compared to benefits earned p Trends in asset allocations p Key assumptions p26 5. Accounting standards for pensions p New version of IAS19 p Disclosures overhauled p FRS17 changes p Tail wagging the dog? p30 Appendix 1 Accounting disclosure listing p32 Appendix 2 Accounting Risk Measures

4 4 Martin Haugh Partner Despite the strong performance of equities, the continued increase in the cost of bonds has resulted in little improvement in funding levels.

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 16 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 13 semi-state/state-controlled companies with defined benefit pension schemes that have published pension accounting information for their 2013 financial year. These bodies have reported under IAS19 or the equivalent local standard, Financial Reporting Standard 17 (FRS17). 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 2013 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 2.1. Benefit reductions step up a gear This year the accounts for many companies show evidence of having reduced member benefits. The reductions have varied from pensionable pay freezes (Grafton), changes in retirement age (An Post), reductions in pension increases (C&C) to closure to future accrual (AIB). Indeed the liability management exercises of some companies incorporated more than one element. At the extreme end of the spectrum the defined benefit pension scheme of Permanent TSB was wound up completely. 1.67bn The total contributions paid by the sponsoring employers analysed into their pension schemes in bn The combined pension scheme deficit of the companies analysed is estimated to be 8.5bn at 31 August 2014 Where before one might have expected that larger companies would have been capable of riding out the pensions storm it is now clear that neither size or indeed state ownership offers protection from benefit reductions or even windup Contributions remain a significant part of scheme deficit funding The companies analysed paid substantial contributions, over 1.67bn, to their pension schemes in While this is a reduction from the 2012 level it is clear that pension schemes remain one of the most significant costs for companies. In many cases, the employer contributions paid were significantly higher than the cost of accrual as attempts continue to eliminate past service deficits Falls in bond yields since year end substantially increase deficits There has been a dramatic fall in yields on high grade Eurozone bonds from 1 January 2014 to date. The market related methodology of the accounting standards has meant that this has translated into large increases in the value of pension scheme liabilities. LCP estimates that the combined Irish net accounting deficit of funded pension schemes for the companies analysed was 4bn in December LCP estimates that despite positive market returns decreasing bond yields have resulted in the total deficit increasing to 8.5bn at 31 August The fall in high grade Eurozone bond yields over 2014 is likely to have a severe impact on the 2014 balance sheets of many companies, if not reversed before the year end. Further detail and analysis can be found in section 4.

7 LCP Ireland Pensions Accounting Briefing Executive Summary Scheme asset allocations remain static The average equity asset allocation for the companies analysed remained unchanged at 50% although this needs to be viewed in the context of the strong performance over the year by the asset class. When compared internationally there is still a significantly higher allocation to equities. There was a slight move out of bonds (from 35% to 33%) into Other asset classes. This is likely to reflect the reluctance of trustees to increase their bond allocations while yields remain low. Should yields revert to more historically normal levels it is possible we could see a stepped increase in bond allocations. The overall proportion of scheme assets in equities (50%) remains high for Irish schemes when compared to other jurisdictions. For example, defined benefit pension schemes operated by FTSE 100 companies in the UK now hold just 33% of their assets in equities Impact of IAS19 Accounting Standard Changes For the first time in 2013 companies reported their results under a revised version of the international pensions accounting standard IAS19. The replacement of the expected return on assets element of pension cost has resulted in a higher P&L charge for many companies. Executive Summary FRS17 will effectively be abolished for accounting years starting after 1 January Prior year comparators will be required for This may have important implications for those reporting under FRS and they should consider the implications of the change now. The revised IAS19 and the upcoming changes to FRS17 are discussed in Section 5. Fergus Collis Senior Consultant Schemes need to be prepared for 2016 when the Funding Standard Reserve is introduced. It remains to be seen what the impact will be as many schemes struggle to meet even the basic minimum requirement. 1 (UK) LCP Accounting for Pensions 2014.

8 8 Content p8 3. Developments in Irish pension provision 2013/14 p Background p Changes to the Defined Benefit Priority Order p Industrial unrest over pension schemes p Landmark court cases for Defined Benefit pension schemes p Europe proposes revised pension directive

9 Roma Burke Partner We continue to feel that, despite recent changes, legislation still remains ill-equipped to deal with the realities faced by defined benefit schemes. Developments in Irish pension provision 2013/14

10 10 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2013/14 In light of the economic and regulatory challenges faced by pension schemes, the trustees and the sponsor need specialist, separate and independent advice. 2.3bn The estimated amount raised by the pension levy for the Exchequer to date Background After all the uncertainty and the legislative changes of previous years one could be forgiven for thinking that the last twelve months have been calm. The reality is however that many schemes disappeared through windup, benefits have been cut in others and more are in the midst of deficit funding programmes. One of the most significant developments of the recent period has been the increasing involvement of the courts with the recent Element Six and Omega Pharma judgements. Last October, Budget 2014 confirmed that the original Pension Levy would end after However, a new levy of 0.15% was introduced for 2014 and 2015 which has the cumulative impact of a total levy on pension funds of 0.75% in The erosion of pension funds through the Pension Levy is a considerable blow to trustees and employers seeking to eliminate past service deficits in a difficult environment. We also believe it acted as a considerable disincentive to members and employers to contribute to pension schemes. We welcome the announcement in Budget 2015 that the Pension Levy will be discontinued after The 2014 Budget also saw the Standard Fund Threshold (SFT) reduced from 2.3m to 2.0m. This is relatively straight forward to apply for defined contribution funds but for those with defined benefit pensions the application of the new regime is complicated. The factors used to capitalise a defined benefit pension are age related, varying from 37 at age 50 to 22 at age 70. The new factors apply to pension benefits accrued after 1 January 2014 with the previous factor of 20 applying to benefits already accrued. Those above the 2.0m limit on 1 January 2014 are now able to apply for a Personal Fund Threshold (PFT) determined under the old regime. Global equity markets performed very strongly in 2013 but less so in 2014 to date. Government bond yields rose in 2013 but have since retreated significantly again in The combined effect has seen a decrease in the size of defined benefit pension schemes deficits over 2013 but a reversal of these gains over 2014.

11 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2013/ Changes to the Defined Benefit Priority Order In November 2013, following a related judgement from the European Court of Justice (ECJ) earlier in the year, the Minister for Social Protection announced Government approval for a number of measures aimed at assisting defined benefit pension schemes that have insufficient assets to meet their statutory liabilities and have chosen to wind up or restructure their scheme. When a pension scheme winds up with insufficient assets to cover the cost of accrued benefits, the assets are distributed in accordance with the Priority Order set out in the Pensions Act. Broadly, benefits for pensions in payment (up to a certain level) are secured first before other benefits are paid out to non-pensioner members. In some recent cases, this has meant that a pensioner sees his pension continuing in full while a person who has not yet reached retirement receives little or no pension benefits. The measures also sought to bring the Irish state into compliance with the 2008 Employer Insolvency Directive (2008/94/EC) for the protection of pension scheme members in cases of double insolvency (ie employer and pension scheme insolvent). It remains to be seen if these measures are ultimately deemed sufficient to comply with the Directive Industrial unrest over pension schemes 2013 and 2014 saw pension schemes making the headlines with two of the biggest pension schemes in the country, ESB and DAA/Aer Lingus/SAA were involved in high profile disputes in relation to pensions. The LRC brokered a deal in December 2013 between ESB management and the Unions which averted a strike. Further tensions arose in March 2014 when the Unions threatened legal action if the company s annual accounts did not refer to its pension scheme as defined benefit rather than as a balance of costs scheme. Developments in Irish pension provision 2013/14 In July 2014, a committee representing SIPTU members at Dublin Airport Authority rejected expert panel proposals on how to address the reported 780m deficit in the pension scheme of the Dublin Airport Authority, Aer Lingus and the Shannon Airport Authority. The union also faced legal actions following a planned strike action which did not go ahead.

12 12 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2013/ Landmark court cases for Defined Benefit pension schemes There were two very significant court cases with implications for other defined benefit pension schemes. In February 2014, the High Court ruled that the trustees of the scheme of Element Six in Shannon, Co. Clare, had acted reasonably and in the interests of the members as a whole when they agreed in November 2011 to accept an offer to wind it up on the basis of a contribution of 37.1m from the company. Members had sued the six trustees claiming breach of trust and conflict of interest in accepting the offer and said they should instead have demanded the company make a 129.2m contribution to make up the deficit. The claims were denied. In July 2014, the High Court delivered a judgement which ruled that the Principal Employer of the Omega Pharma Ireland Pension and Death Benefit Scheme was required to comply with a contribution demand for 2.23m issued by the Trustees. The pension scheme in question was to be wound up following the issue of notice by the Principal Employer to terminate contributions. The Trustees then issued a contribution demand on the Principal Employer during the three month notice period for the cessation of contributions. The contribution demand issued by the Trustees was for an amount significantly greater than the funding shortfall when the Scheme s liabilities were assessed under the Pensions Act Minimum Funding Standard (MFS). In effect the Trustees (and Scheme Actuary) had stated that the payment of an amount equal to the MFS liability value to or on behalf of members would not be sufficient to provide the benefits under the Scheme. Instead, an alternative more prudent basis for calculating the liability was used resulting in the contribution demand for 2.23m. This was upheld by the judge.

13 LCP Ireland Pensions Accounting Briefing Developments in Irish pension provision in 2013/ Europe proposes revised pension directive On 27 March 2014 the European Commission put forward a new proposed pension directive. As a result of lobbying from affected EU member states the stringent funding requirements that had previously been put forward have been removed and/or deferred, and so the new directive focuses solely on governance and reporting requirements. The directive is intended to come into force in 2017 and is likely to require an increase in standards of governance and disclosure, as it brings pension scheme requirements in these areas more into line with those applying for insurance companies. Schemes will be required to have a risk management function, an internal audit function, and will need to provide prescribed information to all of their members each year. The costs associated with the new requirements are expected to be significant and may encourage employers to wind up legacy DB pension schemes. Developments in Irish pension provision 2013/14

14 14 Content p14 4. LCP s analysis of pension accounting disclosures p Introduction p Reported funding levels p Development of pension scheme deficits during 2014 p Company exposure to pension schemes p Contributions compared to benefits earned p Trends in asset allocations p Key assumptions

15 Michael Butler Head of Investment Consulting Despite strong market performance, funding proposals remain under pressure as the reversion in bond yields that was hoped for fails to materialise. LCP s analysis of pension accounting disclosures

16 16 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 4.1. Introduction We have analysed the financial position of 29 companies defined benefit pension schemes. A full list of the companies can be found in Appendix 1. In the 2013 LCP Ireland Pensions Accounting Briefing, we took the 30 largest companies (by market capitalisation) on the ISEQ and analysed those with defined benefit pension arrangements. Continuing market challenges means that the fortunes of many companies have continued to evolve. 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, we have looked at the top 30 companies in the ISEQ and analysed the 12 of them who have reported material defined benefit pension liabilities. In addition we have also included DCC, Grafton, Greencore and United Drug (these companies are listed on other exchanges, but operate pension schemes in Ireland). We have also analysed the largest pension schemes in the semi-state/state-controlled sector. Irish Bank Resolution Corporation and Permanent TSB do not appear this year as their defined benefit pension schemes are winding up. As a result of these changes to the companies analysed, comparative figures provided for 2012 may differ from those provided in last year s report. 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 Reported funding levels The accounting standards look at the value of pension scheme assets and liabilities at the accounting date. Of the companies analysed in this survey, only one reported that it had sufficient assets to meet its accounting liabilities (RTÉ). Last year there was also only one company in this position (Kingspan). RTÉ disclosed the highest funding level (101%), while two companies (Coillte and Smurfit Kappa) disclosed funding levels of less than 70%.

17 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 17 The average funding level for the schemes analysed rose from 81% in 2012 to 85% in The following chart shows how funding levels have changed over the year for the companies analysed. This general improvement was due to the strong rise in scheme assets (mainly equities) in While the yields on the vast majority of high quality corporate bonds (used to place a value on the accounting liabilities) rose over the 12 months, this does not appear to have been reflected in the discount rates chosen. If it had, the improvement in funding levels would have been greater. 85% The average funding level (assets as a proportion of liabilities) for the companies analysed was 85% in Ratio of assets to accounting liabilities (%) Number of companies under 60% 60% - 69% 70%-79% 80%-89% 90%-99% over 100% 4.3. Development of pension scheme deficits during 2014 World equity markets recorded strong gains again in 2014, up over 12% to the end of August. This was as a result of improving economic data particularly from the US. Markets were also positive on the announcement in June of a series of measures designed to reignite growth and stem the risk of deflation in the Eurozone. However, high quality corporate bond yields have fallen by about 1.2% pa on average since the end of These lower yields mean that IAS19 liability values have increased significantly during 2014 (as pension scheme liabilities are calculated by reference to these yields for accounting purposes). LCP s analysis of pension accounting disclosures Pension liabilities are generally very long term in nature. As a result, small movements in discount rates can have a significant impact on the value of the pension liabilities. A fall in the discount rate in accordance with observed bond yield movements over 2014 will have a dramatic impact on the value of pension liabilities. If the falls observed are not reversed during Q4 2014, the pension liabilities disclosed for many companies in their 2014 accounts will be at unprecedented highs. Indeed, the balance sheet impact may lead to further pressure on Trustees to amend benefits despite the measures taken in recent years.

18 18 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures LCP estimates that the aggregate pension deficit for the Irish funded schemes of the companies analysed stood at 8.5bn as at 31 August Projected aggregate pension deficit 0 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14-1 Surplus/Deficit bn State-owned companies ISEQ listed companies Source: LCP Ireland's Accounting for Pensions report 2014 Note: all data is at month ends. Data is for the Irish pension arrangements of the companies analysed and has been estimated from the pensions disclosures of their published company accounts. As the graph demonstrates, there can be significant volatility in the level of deficits from month to month as equity and bond yields fluctuate.

19 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Company exposure to pension schemes Accounting liabilities as a proportion of market capitalisation (%) 7 Number of companies under 5% 5% 14% 15% 24% 25% 49% 50% 74% 75% 99% 100% 149% 150% 199% 200% + The chart above shows the size of 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 over the year from 30% in 2012 to 24% in The following lists the companies with the largest pension scheme liabilities expressed as a percentage of their market capitalisation at their 2013 year-end dates: 24% The total pension scheme liabilites expressed as a proportion of market capitalisation for the companies analysed was 24%. Greencore: 88% (150% in 2012) Bank of Ireland: 77% (179% in 2012) Smurfit Kappa: 57% (116% in 2012) 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 2.7 times the cost of benefit accrual. The contributions made by C&C Group, Diageo and DCC were over 5 times the cost of benefit accrual under IAS19.

20 20 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Ryanair, FBD Holdings plc, Forfas, RTÉ, 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 8 Number of companies <50% <100% <150% <200% <250% <300% <350% >350% Ratio of contributions paid to benefits earned (%) 50% The average equity allocation for the pension schemes analysed has not changed during This is still significantly higher than pension schemes in other jurisdictions Trends in asset allocations In 2013 the level of exposure to equities was unchanged from 50% in The continuing high price of EU sovereign bonds has presented a difficulty for many Trustees seeking to de-risk further, with many appearing to adopt a wait and see approach before increasing bond holdings further. The average split of assets for the pension schemes analysed is shown in the following chart Asset allocation 17% 33% 50% Equity Bond Other Companies who reported the highest equity holdings were Ryanair (77%), Irish Dairy Board (76%) and Grafton Group (71%). On the opposite end of the spectrum, C&C Group held 25% in equities while AIB held 31%. There is evidence that a number of trustee boards are continuing to actively review their investments and in many cases implementing de-risking strategies. We expect this trend to continue as many schemes review their asset strategies as part of their recent funding proposals.

21 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 21 The shift from equities is particularly evident at an individual company level with some accounts showing significant falls in equity allocations during 2013: AIB: equity holding reduced from 45% to 31%. Bord na Móna: equity holding reduced from 51% to 42% VHI: equity holding reduced from 53% to 46% Some companies reported increases in equity holdings and this may be partly due to equities outperforming other assets held during For example FBD reported an increase in its equity holding of 9%, Irish Continental an increase of 5% while Aryzta and Ryanair 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 about 33% 2 of assets were allocated to equities at 31 December 2013 compared with 50% for the Irish schemes in this report 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. 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. LCP s analysis of pension accounting disclosures In the following chart, we have analysed companies reporting with December 2013 year-ends. 2 (UK) LCP Accounting for Pensions 2014.

22 22 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures Discount rates used at 31 December (% pa) Number of companies % 3.7% 3.9% 4.1% 4.3% 4.5% 3.8% pa The average discount rate adopted by the companies in this report fell slightly from 3.9% in 2012 to 3.8% in The majority of companies analysed disclosed a discount rate in the range 3.5%-4.0% pa. The Merrill Lynch 10+AA Corporate index rose from 2.6% pa at 31 December 2012 to 3.0% pa at 31 December 2013 while the average discount rate for companies reporting at 31 December 2013 fell from 3.9% pa to 3.8% pa. This fall is therefore not consistent with the rise observed in corporate bond yields over 2013 and highlights the practical difficulties in determining the appropriate yield for very long dated liabilities. For example, in the Eurozone, there are very few suitable high quality corporate bonds with a sufficiently long duration from which to determine an appropriate discount rate. Companies and their advisers take a variety of approaches to deal with this, including allowing for a credit spread over appropriate government bond yields or applying various curve fitting methods to derive a yield curve of AA rated corporate bonds. 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 VHI (4.0%), NTMA (4.0%) and Irish Aviation Authority (4.0%). 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 3.75% pa to 2.75% pa) would increase the Coillte pension scheme liabilities by 66.1m (or 19%) at the accounting date. Similarly, a decrease of 1% in the discount rate used by FBD (from 3.8% pa to 2.8% pa) would increase the pension scheme liabilities by 39.9m (or 25%). Life expectancy All of the companies analysed have disclosed some information about the life expectancy assumption.

23 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures 23 Life Expectancy assumption Individuals aged 65 on accounting date Number of companies Age at death (rounded to nearest age) Male Female The above 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 The average assumption was that male members who retire at age 65 at the accounting date would live to age 87.2 (89.0 for females). After several years of increases in the average life expectancy, our 2013 survey indicates that the average life expectancy for males aged 65 at the accounting date has remained the same from the 2012 survey. However, this overall average hides some changes where some companies increased their assumed life expectancy and others decreased their assumption. Kingspan increased the life expectancy for a male aged 65 by 2.2 years. An Post increased it by 1 year and Aryzta and FBD increased it by 0.5 years. However, Coillte and Bord Gais both disclosed reductions in their assumed life expectancy for a male aged 65 of 0.6. 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. 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.

24 24 LCP Ireland Pensions Accounting Briefing LCP s analysis of pension accounting disclosures On average, the companies analysed are assuming that over the next 20 years, the life expectancy of male retirees will increase by approximately 2.4 years. This represents a small increase 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, most companies reporting at 31 December 2013 adopted an inflation rate of 2% pa. This is consistent with the long term ECB target rate of inflation. Note however that actual observed inflation has been lower than assumptions in recent years and this has generally resulted in a commensurate actuarial gain emerging at the year end.

25 Fergus Collis Senior Consultant It is difficult not to feel for the typical defined benefit scheme member whose once guaranteed pension is now only a possible pension. Uncertainty in the run up to retirement is not ideal. LCP s analysis of pension accounting disclosures

26 26 Content p26 5. Accounting standards for pensions p New version of IAS19 p Disclosures overhauled p FRS17 changes p Tail wagging the dog?

27 John Lynch Partner Markets rise and fall, legislation changes but the fundamentals remain the same... no matter what type of scheme you are in, if it doesn t have enough money, benefits will be less than expected! Accounting standards for pensions

28 28 LCP Ireland Pensions Accounting Briefing Accounting standards for pensions 5.1. New version of IAS19 For the first time in 2013 companies reported their results under a revised version of the international pensions accounting standard IAS19. In particular, two changes that we have flagged in previous surveys have now come into force: the option of only recognising gains and losses that fall outside a corridor has been removed; and the expected return on assets has been abolished, replaced by a net interest item calculated using the IAS19 discount rate. 5.2 Disclosures overhauled As we have commented in previous surveys, the information given by companies on their pension schemes in the past has not always been commensurate with the pension risks that they run. For example, lengthy pension disclosure notes have often lacked key information needed to understand companies pension obligations, with important messages obscured by unnecessary clutter and detail. The new version of the accounting standard IAS19 is intended to remedy this by introducing new, principles based, disclosure requirements that ask companies to identify the key risks and figures that matter. This year we have seen additional disclosure of items such as the sensitivity of the pension figures to different assumptions and financial conditions; and the average term or duration, of the liabilities. These are important improvements given that changes in financial conditions can lead to huge changes in the pensions figures disclosed. As an example of enhancements in this area, Bank of Ireland has included several additional paragraphs on risk in its 2013 accounts. In general, the new accounting standard has increased the level of detail disclosed in relation to investment strategies. This is a welcome improvement given the sophisticated strategies that are now in place for many pension schemes.

29 LCP Ireland Pensions Accounting Briefing Accounting standards for pensions FRS17 changes Many Irish companies do not disclose pension costs under IAS19 but rather under the local FRS17 standard. This is the case for a number of the semi-states analysed in this report. There are some fundamental changes being made to the accounting standard for companies reporting under FRS17. The existing FRS17 will effectively be abolished for accounting years beginning on or after 1 January 2015 and replaced with rules based on international accounting standard. Prior year comparators will also be required for One significant change will be the removal of the expected return on assets element of the P&L charge to be replaced with interest based on the discount rate (as required under IAS19). While the principles of valuing assets and liabilities on the balance sheets are similar, the new rules based on international standards have very different rules for recognising surpluses. We recommend that companies reporting under FRS17 take action now to establish the likely impact of the changes on results. 5.4 Tail wagging the dog? With all the extra information companies are now required to provide about their pension arrangements, there is a danger that some will start to believe that the accounting numbers are real and so use them as the basis for strategic decisions. This is unwelcome as, in our view, decisions should be based on sound advice and information rather than on the technical treatment of a particular transaction under the accounting rules. Basing decisions on accounting numbers seems to us to be a classic case of the accounting tail wagging the strategic dog. Mick O Byrne Senior Consultant If the ECB decides to purchase corporate bonds, it will not be good news for companies accounting liabilities. Accounting standards for pensions

30 30 LCP Ireland Pensions Accounting Briefing 2014 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 2012 figures have been restated Surplus/(deficit) 2012 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 145 (22) (19) 3.59% 2.56% 148 (24) (20) Bank of Ireland Dec 5,412 (841) (841) 3.65% 2.00% 5,062 (1,075) (1,075) C&C Group plc Feb 161 (22) (22) % 2.00% 148 (15) (15) CRH Dec 2,314 (410) (349) 3.70% 2.00% 2,142 (653) (592) DCC Mar 117 (23) (23) 3.70% 2.25% 102 (15) (15) Diageo Jun 8,306 (638) (359) 3.60% 1.70% 7,646 (1,344) (1,093) FBD Holdings plc Dec 130 (29) (29) 3.80% 2.00% 119 (31) (31) Glanbia Dec 346 (78) (78) 3.60% 2.00% 333 (98) (98) Grafton Dec 217 (9) (9) 3.65% 2.00% 217 (63) (63) Greencore Sep 448 (165) (165) 3.50% 1.90% 434 (178) (177) Irish Continental Dec 231 (37) (37) 3.60% 2.00% 214 (55) (55) Kerry Group plc Dec 1,005 (252) (231) % % 883 (312) (285) Kingspan Dec 61 (8) % 2.30% 59 (12) 2 Ryanair Mar 35 (14) (14) 4.30% 2.00% 30 (12) (12) Smurfit Kappa Dec 1,625 (713) (226) 3.70% % 1,598 (738) (234) United Drug Sep 67 (5) (5) 3.90% 2.00% 62 (8) (8)

31 LCP Ireland Pensions Accounting Briefing 2014 Appendix 1: Accounting disclosure listing Surplus/(deficit) 2012 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 5,242 (94) (94) 3.90% 2.00% 4,774 (762) (778) An Post Dec 2,197 (229) (214) 3.75% 2.00% 2,018 (285) (271) Bord Gais Dec 320 (49) (49) 3.90% 2.00% 304 (39) (39) Bord na Mona Mar 272 (59) (54) 3.00% 1.75% 251 (46) (42) Central Bank of Ireland Dec 531 (85) (85) 3.70% 2.00% 474 (97) (97) CIE Dec 1,538 (418) (418) 3.90% 2.00% 1,453 (492) (492) Coillte Dec 224 (130) (130) 3.75% 1.90% 196 (161) (161) Forfas Dec unfunded (1,190) unfunded 3.50% 2.00% unfunded (1,188) unfunded Irish Aviation Authority Dec 392 (130) (130) 4.00% 1.80% 361 (146) (146) Irish Dairy Board Dec 117 (26) (26) 3.80% 2.00% 105 (34) (34) NTMA Dec 76 (4) (4) 4.00% 2.00% 62 (1) (1) RTE Dec % 2.00% 833 (47) (47) VHI Dec 169 (39) (39) 4.00% 2.00% 151 (42) (42) This briefing analyses 12 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 2013 figures are as at the end of the accounting periods ending in The 2012 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 Diageo, Grafton and Greencore accounts using the Euro conversion rate applicable at each company s year-end (Diageo: at 30 June 2013 (2012: ), Grafton: at 31 December 2013, Greencore: at 27 September 2013 (2012: )).

32 32 LCP Ireland Pensions Accounting Briefing 2014 Appendix 2: Accounting Risk Measures The tables show the key results of analysis of the 2013 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 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 liabilities (including unfunded liabilities) Name 2013 Liabilities m 2012 Liabilities m Diageo 8,944 8,991 Bank of Ireland 6,253 6,137 AIB 5,336 5,536 CRH 2,724 2,795 An Post 2,426 2,302 Largest deficits Name 2013 Deficit m 2012 Deficit m Bank of Ireland 841 1,075 Smurfit Kappa Diageo 638 1,344 CIE CRH Largest liabilities compared to market capitalisation 2013 Name Liabilities m Market cap m Liabilities/ Market cap % Greencore % Bank of Ireland 6,253 8,156 77% Smurfit Kappa 2,338 4,086 57% Irish Continental % FBD Holdings plc % Largest deficits compared to market capitalisation 2013 Name Deficit m Market cap m Deficit/ Market cap % Greencore % Smurfit Kappa 713 4,086 17% Bank of Ireland 841 8,156 10% Irish Continental % FBD Holdings plc %

33 LCP Ireland Pensions Accounting Briefing 2014 Appendix 2: Accounting Risk Measures 33 Highest equity allocation 2013 Equity 2012 Equity Name allocation % allocation % Ryanair 77% 74% Irish Dairy Board 76% 74% Grafton 71% 71% Kingspan 70% 68% Kerry Group plc 64% 62% Lowest equity allocation 2013 Equity 2012 Equity Name allocation % allocation % C&C Group plc 25% 26% AIB 31% 45% Smurfit Kappa 32% 33% Aryzta AG 33% 29% DCC 35% 35% Highest funding level Name 2013 Assets m 2013 Liabilities m Assets/ Liabilities % Assets/ Liabilities % RTE % 95% AIB % 86% Grafton % 77% NTMA % 99% United Drug % 88% Lowest funding level Name 2013 Assets m 2013 Liabilities m Assets/ Liabilities % Assets/ Liabilities % Coillte % 55% Smurfit Kappa % 68% Ryanair % 72% Greencore % 71% Irish Aviation Authority % 71% Largest employer contributions Name 2013 Contributions m 2012 Contributions m Diageo AIB Bank of Ireland CRH Smurfit Kappa 97 85

34 34 LCP Ireland Pensions Accounting Briefing 2014 Appendix 2: Accounting Risk Measures Largest service cost Name Service cost m Service cost m Diageo Bank of Ireland AIB CRH Smurfit Kappa Largest employer contributions compared to service cost Contributions/ Contributions/ Name Contributions m Service cost m current service cost % current service cost % Kingspan % 5396% C&C Group plc % 843% Diageo % 173% DCC % 607% Glanbia % 477% Largest increase in funding level Name 2013 Funding level % 2012 Funding level % Increase in funding level % Grafton 96% 77% 24% Coillte 63% 55% 15% AIB 98% 86% 14% CRH 85% 77% 11% Diageo 93% 85% 9% Largest decrease in funding level Name 2013 Funding level % 2012 Funding level % Decrease in funding level % DCC 84% 87% -4% NTMA 96% 99% -3% C&C Group plc 88% 91% -3% Bord na Mona 82% 85% -3% Bord Gais 87% 89% -2% 3 Note: The contributions made by Kingspan were 15 times the cost of benefit accrual. The main defined benefit scheme sponsored by Kingspan is closed to future accrual with significant contributions continuing to eliminate the deficit.

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36 LCP Ireland Pensions Accounting Briefing 2014 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 Docks 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 IE 1114/1114 London Winchester Brussels Dublin Utrecht Abu Dhabi