Defined benefit pension scheme sponsors reporting under International Accounting Standard 19, Employee Benefits, have ended 2021 in a broadly favourable position, consultants have told IPE.
Higher discount rate assumptions and asset growth could potentially alleviate the impact of a pick-up in inflation assumptions in both the UK and across the wider euro zone.
Hymans Robertson partner Matt Davis said: “For sponsors of UK schemes with a 31 December 2021 year-end reporting under IAS19, we would expect to see discount rates of around 1.9% per annum.”
Retail price index assumptions, he added, have come in at around 3.3% per annum.
“There will be a range of assumptions adopted depending on company-specific factors, such as the maturity of a pension scheme,” he said.
Early data show the trend has persisted into the first quarter of 2022 with UK discount rates up 50 basis points to mid-February.
In addition, accounting experts at WTW reported discount rates across a range of plan maturities of between 1.8% and 2% per annum.
On inflation, the firm reported RPI on a range of 3.2% and 3.8% on an annual basis and CPI of between 2.5% to 3.3%.
LCP partner Jonathan Griffith said: “There was an element of deja-vu as scheme sponsors dealt with another year-end against the economic backdrop of market volatility and COVID uncertainty.”
But he also warned that while the situation facing FTSE100 sponsors has improved over the past year, challenges remain.
Meanwhile in the euro zone, the benchmark Mercer Yield Curve stood at 1.31% at the end of 2021 on a duration of 15 years.
Thomas Hagemann, Mercer’s chief in Germany, said: “There was little volatility in the second half of 2021, although we did see more in December.”
This compares with a figure of around 1% at the end of 2020.
Higher discount rates – at least taken in isolation – typically lead to lower balance-sheet obligations.
Paul Adams, who sits on the global accounting committee of consultants Aon, confirmed the impact of rising prices on the accounting position for European sponsors.
He said: “There has been a huge movement in the assumption over the year. So, if you look purely at the swap curve, inflation is up about 0.8% – this is more than the increase in the discount rate.”
He added: “This would mean that for a fully inflation-linked plan, the reduction in liabilities caused by the increase in discount rate may be more than offset by the increase in liabilities due to the increase in the inflation assumption.”
Adams noted, however, that because not all benefits are inflation-linked, the impact of the rise in inflation assumptions will depend on each sponsor’s particular circumstances.