Lower 2016 interest rates increases the challenge for defined benefit schemes

Irish defined benefit liabilities are determined for Minimum Funding Standard (MFS) purposes by reference to the yield on a specified long bond for pre-retirement members and by reference to annuity costs for retirees. Many defined benefit schemes will have experienced a deterioration in the MFS funding level during the first six months of 2016, depending on the assets held. Schemes with mixed assets may have a close to flat performance so far this year as equities have fallen and bonds have risen. Absolute return funds do not move in unison and some have done well, others not. The yield on the specified long bond has fallen over 1% so far this year. Over the short-term, this creates a fresh MFS challenge. The following chart shows the yield movement: Further falls in bond yields places increased pressure on defined benefit schemes