“The assumptions used by the FTSE 350 in their DB pension disclosures provide a valuable insight into the health of the current DB universe and highlight developing trends. This year our annual analysis of the assumptions in our IAS19 report has shown three particular areas that have had an impact on liabilities and deficits – adjustments in longevity expectations, discount rates and the start of the acknowledgement of the impact of pension transfers.
“Discount rates: Discount rates are the most significant financial assumption for assessing pension obligations and are lower than reported last year. They varied from 2.3% to 2.8% with an average of 2.5%. I expect the larger spread this year reflects more companies taking alternative approaches to setting the discount rate, with different extrapolation methods often adding 0.1-0.2% to the discount rate. This is likely to become more common if yields remain low.
“Longevity: A number of companies are reporting falls in disclosed life expectancy. Life expectancies are lower than last year by 0.2 years for pensioners and 0.5 years for non-pensioners on average. This results in 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.
“Transfers: Firms are beginning to see the need to make an allowance for pension freedoms, with one firm already making assumptions for members taking transfer values out of the scheme in the future, increasing liabilities by about 2%. This is a trend we expect to increase and is likely to have the impact of increasing liabilities.”
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