Just over half of all FTSE 350 defined benefit (DB) sponsors are using a discount rate in the range of 2% to 2.09% to account for their pension obligation, the latest Hymans Robertson pensions accounting survey for 2019 revealed.

The firm also noted a continuation of the trend for discount rates across sponsors to bunch in an ever narrower band around the average with 94% of sponsors falling within +/–0.1% of that mark.

The firm said: “A higher concentration around the average assumption this year may reflect a toughening stance taken by auditors when reviewing pension disclosures, following increased scrutiny of the profession in response to recent high profile corporate failures.”

They added, however, that increased market volatility from the COVID-19 will likely see an increase in the range of assumptions reported during 2020.

Hymans Robertson partner Matt Davis told IPE: “Market volatility in the first half of 2020 led to falls in discount rates.

“This volatility is expected to produce higher pensions liabilities for 30 June 2020 mid-year reporting compared to 2019 year-end reporting, meaning pensions may now form a more significant part of the balance sheet than six months ago.” 

Among the other key pensions accounting assumptions, the Hymans number-crunchers found:

  • RPI assumptions ranged from 2.6% to 3.4%;
  • CPI assumptions came in between 1.8% and 2.4%;
  • average pensioner life expectancy of 87.2 years for men and 89 years for women.

In terms of inflation, generally speaking the second most significant pensions accounting assumption, the survey found that overall RPI assumptions ranged from 2.6% to 3.4% – with an average assumption of 3% – while CPI assumptions varied from 1.8% to 2.4%, against an average assumption of 2.1%.

The inflation assumption typically drives other assumptions such as salary growth, deferred revaluation and any index-linked pension increases. A higher inflation figure generally increases pension liabilities.

More broadly, the firm noted that “[r]educed economic activity has resulted in a decrease in short-term inflation” with a “notable fall in longer term RPI expectations in March”.

Further on the longer-term outlook, Hymans said COVID-19 and uncertainty over the UK government’s planned reform of RPI will continue to hang over the longer term market views on inflation.

A public consultation on proposals to align the two inflation measures ended on 21 August.

The Hymans survey also reported some movement in the so-called wedge – the difference between RPI and CPI – which came in lower at 0.9%.

The consultancy said this could reflect market reaction to the prospect of reforms to RPI in the UK.

Furthermore, just 12% of sponsors surveyed had a wedge of 1.1%, with the assumption ranging from 0.5% to 1.1%.

In total, the survey data showed 77% of UK sponsors now deduct an inflation-risk premium of around 0.2%.

Finally, on mortality, Hymans reported a spread of some six years across the assumptions relied on by FTSE 350 sponsors for both pensioners and non-pensioners.

Average pensioner life expectancy currently stands at 87.2 years for men and 89 years for women, and at 88.6 and 90.5 years respectively for non-pensioners.

The firm noted that the current decade has seen a slow down in the rate of improvement in longevity compared to the late-1990s and the 2000s.

It went on to warn that the COVID-19 pandemic leaves the outlook for future developments uncertain.

Davis added: “Sponsors should be aware that events that cause changes in liabilities, such as a scheme closure, could lead to remeasurement of P&L. This could be particularly significant at present given market moves so far in 2020.”

“Looking more widely at their pensions strategy, sponsors should check their overall approach to pensions fits within their risk appetite given that COVID-19 might have shifted the parameters of the risks they are prepared to run.”

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