Big jump in liabilities likely if no change seen in market statistics

The latest version of our Current Issues in Pensions Financial Reporting newsletter has just been released and it gives some interesting considerations for company directors for the end of Q3 2014.

The yields on bonds of all types were lower than they were a year ago (30 September 2013).  Since accounting standards (such as IAS19 and FRS17) require the discount rate used for determining pension liabilities to be based on yields on high quality corporate bonds, we expect to see significantly lower discount rates being adopted for accounting purposes when compared to last year.

Equities were at a higher level as at 30 September 2014 compared to a year earlier and this will mitigate the increase in liabilities to some extent for Companies' preparing accounts at that date.  Looking forward to the end of 2014 (when many Companies will be preparing their financial statements) the impact of the lower bond yields could be more significant as equities remain at similar levels to 31 December 2013 (and have actually moved lower over the last two weeks).  The overall effect of any movements in the market will differ depending on each scheme’s asset allocation but schemes not matching their liabilities with assets such as bonds or gilts will most likely see their accounting position worsen.

If yields on corporate bonds remain low and equity returns continue to see little movement over Q4 2014, companies can expect to see significant increases in their reported pension liability figures. 

Our newsletter, available below, goes into more detail about these issues.