FTSE100 defined benefit (DB) scheme sponsors shrugged off falling discount rates and unprecedented turmoil to post their best year yet on an accounting basis since the introduction of the IAS 19 accounting rulebook in 2005, consultancy LCP found in its latest accounting trends report.

LCP partner Jonathan Griffith said: “Following a year like no other and over a decade of volatility, the pension schemes of FTSE100 companies have started 2021 from a position of strength – with improved funding levels and reduced risk.”

Overall, UK DB schemes ended the year with an aggregate balance sheet surplus of £10bn, the report found. However, the key discount rate assumption continued to drag on scheme liabilities.

According to the report, the majority of FTSE100 sponsors adopted an assumption lying in a range of 1.3% to 1.4% per annum.

The figures represent a reversal on the previous year’s trend when annual assumptions bunched in a range of 2.0% to 2.1%.

This downward momentum has prompted a number of sponsors to investigate innovative approaches to discount-rate setting such as investigating alternative datasets or rethinking their definition of the notion of a high-quality corporate bond.

In terms of mortality assumptions, the majority of scheme sponsors in the survey have opted to make no allowance for the effect of COVID-19 on their main assumptions.

LCP noted, however, that the potential impact of the pandemic could ultimately be “very material”.

One estimate puts the difference in balance sheet impact between flatlining mortality improvements over the coming decade or a reversion to 2000s vintage trends at £100bn across all UK DB schemes and £30bn across FTSE100 schemes.

Finally, the report also found that the UK government’s announcement concerning the reform of the way the retail price index (RPI) is calculated has resulted in “greater variance in inflation assumptions” across the sponsors sampled.

More than 40% of sponsors in the report disclosed an RPI assumption of between 2.9% and 3.0% per annum – suggesting an inflation risk premium of some 0.2% where breakeven inflation is at 3.0% to 3.1%.

The RPI represents the risk premium demanded by investors to reflect the risk of holding fixed-interest UK government debt rather than index-linked gilts.

Other key trends identified in the LCP report include:

  • FTSE100 sponsors have paid in £200bn in contributions since the start of the financial crisis in 2007;
  • 60% of sponsors sampled in the report have an IAS 19 surplus;
  • schemes in deficit paid out a total of £30bn in dividend payments while making just £5bn in scheme contributions.

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