QUARTERLY GUIDE to PENSIONS ACCOUNTING

01 October 2015

This guide is intended for use by finance directors in discussions with their actuaries and auditors on the actuarial assumptions to be adopted for recognising pension assets and liabilities in financial statements. It is divided into five sections:

  • Changes in market conditions since 30 September 2014
  • Expected assumptions at 30 September 2015
  • Recent developments
  • Latest information from FTSE 100 company disclosures
  • Simple guide to IAS 19

MARKETS BETWEEN 30 SEPTEMBER 2014 AND 30 SEPTEMBER 2015:

  • The FTSE All-Share Total Return Index has decreased by 2.3%
  • The MSCI World Index (GBP) has decreased by 0.3%
  • The iBoxx >15 year AA corporate bond yield index has decreased from 3.85% to 3.65%
  • The FTSE 20 year fixed interest gilt yield index has decreased from 2.95% to 2.40%
  • The Bank of England 15-year spot inflation rate has decreased from 3.25% to 3.05%

AA corporate bond yields have fallen over the year, which will lead to lower discount rates and a higher value being placed on pension liabilities. Part of this increase has been offset by lower expectations of inflation, but in general, pension liabilities will have increased compared to last year.

The main driver of balance sheet volatility will be on the asset side. Equity markets have been lacklustre, particularly in Q3. On the other hand, gilt markets have performed well, and in particular have outperformed corporate bonds.

Therefore, pension plans heavily invested in growth assets are likely to see an increase in deficits overall.

Pension plans with a significant proportion of assets allocated to gilts and other fixed interest investments will have performed better, with those plans heavily invested in gilts potentially seeing an improvement in the balance sheet position.

EXPECTED ASSUMPTIONS AT 30 SEPTEMBER 2015

The expected range of assumptions at 30 September 2015 is as follows. For the discount rate and inflation assumptions we would expect more mature plans to adopt assumptions towards the lower end of the range indicated and less mature plans to adopt assumptions towards the higher end of the range indicated.

  • Discount rate:  3.40% to 4.00%
  • Price inflation (RPI):  3.00% to 3.50%
  • Price inflation (CPI):  1.80% to 3.00%
  • Salary inflation:  3.00% to 5.00%

Assumed life expectancy: 25 to 30 years for a male now aged 60 (justified by nature of employee population or historic experience). 1 to 2 years higher for a male retiring 20 years from now.

The full report covers:

RECENT DEVELOPMENTS:

Mortality Improvements |Information on FRS 102| Amendments to FRS 102| Proposed changes to IAS 19 and IFRIC 14| IFRIC 14 - availability of refunds from a defined benefit plan| Remeasurement on a plan amendment, curtailment or settlement| IFRIC14 - continuation of a minimum funding requirement| Discount rates research project| Post-employement benefits research project| discount rates - regional markets | discounting (the vector approach)

LATEST INFORMATION FROM FTSE100 COMPANY DISCLOSURES:

(This analysis is based on the most recent annual report available at 30 September for each FTSE 100 company with a defined benefit pension plan.)

Discount rate| Price inflation (RPI)| CPI inflation| Mortality|

and a Simple Guide to IAS 19:

Balance Sheet| Income Statement| Remeasurements| Disclosure items

Download the report

contact Charles Cowling
Director charles_cowling@jltgroup.com 0161 242 5388