Pension accounting snapshot 31 March 2025

Our latest note on pensions accounting sets out some of the key issues affecting disclosures being prepared at 31 March 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.

Key trends

• Corporate bond yields saw a general rise over the year, leading to higher discount rate assumptions and lower liability values. 
• 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. 
• For schemes with exposure to interest rate risk, the position is likely to have improved, although performance of other growth asset classes has been mixed over the year, so impacts on surpluses and deficits are likely to be mixed. 

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. 

Increasing corporate bond yields

The chart below shows the movements since 31 March 2024 and 31 December 2024 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 31 March 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 31 March 2024, most schemes have likely seen the value of their accounting liabilities decrease, with corporate bond yields rising by around 1% at middle to long durations. This increase in discount rates and corresponding drop in liabilities will be welcome to corporate sponsors, the overall impact on the net balance sheet likely to be positive despite mixed asset returns over the period.

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 chart

 
The chart shows a general reduction in expectations for future long-term inflation since 31 March 2025, with a more prominent drop at shorter terms. In isolation, this will result in a further decrease to any 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 31 March 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 mixed returns in equity markets over the year – modest growth was seen in the UK and Europe, while Japan experienced slight negative returns. The US market performed well throughout the first c.11 months of the year, before dropping significantly during March 2025.