Commenting on the findings of Hymans Robertson’s 2019 IAS19 Assumptions report, published today (11 July), Alistair Russell-Smith, Head of Corporate Consulting, Hymans Robertson, says:

“The assumptions used by the FTSE 350 in their DB pension disclosures always help us to see trends developing in DB universe as well as giving us a gauge about the general health of DB schemes. FTSE 350 companies support £700bn of DB pension liabilities and these same companies have a combined market capitalisation of £2,300bn, so the way these liabilities are measured in company accounts is critical for assessing the financial wellbeing of UK plc.

“This year companies must also be mindful of the changes to IAS19 that came into force in January 2019.  If there is a major scheme event such as a closure to future accrual, member transfer exercise or partial buyout they will have to remeasure their pension expense part way through the year.  This could lead to significant changes in the reported pension expense if market conditions are volatile.

“Our annual analysis of the assumptions in our IAS19 report highlight a number of areas that have had an impact on liabilities and deficits – GMP equalisation, discount rates, CPI inflation, and adjustments in longevity expectations.

“GMP equalisation: Companies had to disclose reserves for GMP equalisation for the first time this year.  Disclosed reserves ranged from 0% to 2.7% of IAS19 liabilities with an average reserve of 0.5%.  The reserve was less than 1% of IAS19 liabilities for nearly three quarters (73%) of the FTSE 350.  So, this shows that the financial impact of GMP equalisation will be less than the 1-2% of liabilities initially assumed by the industry.”

“Discount rates: Discount rates are the most significant financial assumption for assessing pension obligations and this year they have risen.  They varied from 2.7% to 3.1% with an average of 2.8%.  There is more bunching around the average assumption this year.  We expect this is driven firstly by lower demand for alternative approaches because higher yields have reduced liabilities, and secondly by auditors taking a tougher stance following last year’s FRC review.

“Longevity: Most companies are continuing to report falls in disclosed life expectancy. On average disclosed life expectancies are 0.2 years lower this year, equating to a 1-2%  reduction in liabilities.  A note of caution is that the standard tables are based on population data, whereas our Club Vita analysis shows different patterns of longevity improvements amongst different socio-economic groups.  Using the standard tables unadjusted does therefore risk understating life expectancy.

“CPI Inflation: Although the average ‘wedge’ assumed between RPI and CPI remained unchanged this year at 1.0%, it is interesting to see that over a third (35%) of companies used a higher wedge of 1.1% this year.  If all of the FTSE 350 used a CPI wedge of 1.1% rather than 1.0% this would reduce reported DB pension liabilities by approximately £5bn.  However, we don’t expect this trend to persist, particularly as a House of Lords Economic Affairs Committee Report in January highlighted a number of deficiencies with the RPI measure of inflation, setting out a series of recommendations to address these deficiencies.  If these recommendations are adopted, RPI would move down closer to CPI, reducing the wedge."

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