Our latest pensions accounting snapshot sets out some of the key issues affecting disclosures being prepared at 30 June 2025 under Accounting Standards FRS102 (UK non-listed), IAS19 (EU listed) and Accounting Standards ASC715 (US listed).
Please note that this briefing should not be taken as a recommendation for a particular course of action – please seek advice appropriate to your own circumstances.
Hot topics
- Virgin Media vs NTL Trustees – Government response to historic benefit change uncertainty: Following the Virgin Media v NTL Trustees judgment (where it was ruled that benefit changes made without a valid ‘section 37’ certificate from the Scheme Actuary could be considered void), on 5 June 2025 the UK Government announced its intention to introduce legislation to give pension schemes the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards.
While the legislation’s final wording is yet to be confirmed, it is expected to offer a practical resolution route, potentially reducing the prospect of an entity being required to recognise additional liabilities due to the judgement. - Surplus extraction – Great flexibility for Defined Benefit (DB) scheme sponsors: The Government’s 29 May 2025 response on “Options for DB schemes” confirmed its intention to introduce greater flexibility for surplus extraction from DB pension schemes – with the extraction threshold likely to be set at below buyout funding levels. This development could make a run-on strategy (continuing to operate the scheme rather than transferring liabilities to an insurer) more attractive for sponsors. However, the accounting implications of any strategy and agreements with trustees should be considered in advance.
- Continuous Mortality Investigation (CMI) 2024 model – The biggest model shake-up in eight years: CMI 2024 was released at the end of June. One of the key changes to the model is the introduction of a pandemic overlay, explicitly modelling the mortality spike in 2020 and its gradual decline, while giving full weight to all years’ data. This compares to the approach used in the 2020-2023 models, which included parameterised weightings for mortality in each year since the pandemic. Companies will need to consider whether to adopt the revised model for figures prepared at the next year end.
Financial assumptions
Key trends:
- Corporate bond yields saw a general rise at mid to long terms over the year to 30 June 2025, leading to a higher discount rate assumption and lower liability values for the majority of schemes.
- For schemes that have hedged all or most of their interest rate risk, much of this decrease in liability value will have been offset by falling asset values.
- Schemes with exposure to interest rate risk have likely seen an improvement in position, with generally positive growth asset performance supporting stronger funding levels.
Discount rate
The accounting standards require the discount rate to be based on yields of high quality (usually AA-rated) corporate bonds of appropriate currency, considering the term of the relevant pension scheme’s liabilities. In our experience, audit firms prefer a single equivalent discount rate (SEDR) approach to be used when setting the discount rate.
Corporate bond yields
The chart below shows the movements since 30 June 2024 and 31 March 2025 in the single equivalent discount rates (SEDR) derived using the iBoxx AA-rated corporate bond curve based on sample cashflows for a range of durations. The rates at 30 June 2025 are also shown in the table.
Single equivalent discount rate by duration chart
Alternative yield curve constructions are available that can be used to increase the discount rate assumption.
Since 30 June 2024, the majority of schemes have likely seen the value of their accounting liabilities decrease, with corporate bond yields rising by between 0.4% p.a. and 0.8% p.a. at mid to long durations. However, a more upward sloping corporate bond curve means that schemes with shorter durations may see little change – or even a slight increase – in liability values due to discount rate movements.
Inflation
Retail Prices Index (RPI)
Market-implied future expectations vary depending on the term being considered. Consequently, inflation assumptions are normally set to be a single equivalent rate based on the full inflation curve.
The chart below shows single equivalent inflation rate assumptions based on the Bank of England inflation curve and sample cashflows for a range of durations, before any deduction for an inflation risk premium:
Single equivalent RPI inflation assumption by duration
The chart shows a general decline in long-term inflation expectations since 30 June 2024, with a more pronounced drop at shorter terms. In isolation, this will lead to a decrease in inflation-linked pension scheme liabilities.
Consumer Prices Index (CPI)
For schemes with benefits increasing with reference to the Consumer Prices Index (CPI), for the assumption for CPI inflation is generally set with reference to the assumption for RPI inflation given the limited market for CPI-linked investments.
In light of RPI reforms due in 2030 where RPI will be aligned with the CPIH index, as well as changes in the way that housing costs will be measured from February 2024 onwards, an appropriate CPI assumption at 30 June 2025 is likely to be based on the gap remaining at around 1% p.a. up to 2030, with only a small difference (of up to around 0.2% p.a.) after that date. Further information on the upcoming changes to RPI and CPIH can be found in our 31 December 2024 briefing.
Growth asset performance
The chart below shows the performance of equity markets in the UK, US, Europe and Japan over the year.
Equity market returns
The chart demonstrates that equity market were volatile over the year to 30 June 2025, but ended the year higher. Markets rebounded following a sharp decline in early April, contributing to the positive year-end outcome.
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