FTSE100 survey reveals first increase in pensions discount rate since 2008

Our annual survey of pension disclosures made by FTSE100 companies has revealed that the average IAS19 discount rate for pension obligations has increased by 0.1 percentage point to 4.5%, the first increase since 2008, signalling a reverse in the trend for declining discount rates in recent years.

The last increase in the IAS19 discount rate occurred in 2008 when there was a 0.4 percentage point increase from the 2007 rate (5.8% to 6.2%).

The survey, which is in its thirteenth year, focuses on the assumptions adopted by FTSE100 companies for determining the value of their pension liabilities for accounting purposes.

We have seen a small increase in corporate bond yields over the year and this has been reflected in an average increase in discount rate used for accounting purposes.  This, coupled with strong returns from equity investments has seen an improvement funding levels of pension schemes run by the UK's largest companies.

In the recent past, we have seen a decline in discount rates, contributing to increasing pension deficits.  The reversal of this trend is certainly a welcome change.”

Results from the survey also show:

  • average IAS19 funding level was approximately 91% in 2013 (improved since 2012: 88%) 
  • the average RPI inflation assumption adopted by companies in the survey was 3.4% p.a. (3.0% in 2012)
  • the average difference between RPI and CPI rose to 0.9% p.a. (0.8% p.a. in 2012).  The ‘formula effect’, resulting from technical differences in the way the two indices are calculated, since 2010 has been observed to be between 0.8% and 1.0% p.a.
  • the average real salary growth assumption dropped to 0.3% in 2013 (0.5% in 2012) which is likely to be as a result of an increasing number of schemes implementing caps on pensionable salary increases
  • the average male life expectancy assumption in 2013 increased to 22.8 years for current pensioners (22.5 in 2012), based on a retirement age of 65