At 31 March 2015, yields on AA rated corporate bonds (which are used to set discount rates for pensions accounting disclosures under IAS19 and FRS17) have fallen to the lowest levels experienced since UK entities have been required to account under IAS19/FRS17.
Nick Griggs, Partner, Barnett Waddingham, who is a leading industry expert on the University sector said:
“Although asset classes have seen positive returns, they are unlikely to have kept up with the growth in liabilities. If yields remain at current levels, Universities can expect to see increases in their accounting liabilities of between 20% and 25% as a result of the fall in bond yields alone. The impact will vary according to the specific circumstances of the SAT, including the duration of the SAT’s liabilities. SATs with large exposures to UK equities and benefits which are not linked to inflation are likely to have fared the worst.
“We expect that Universities will want to pay closer attention to the assumptions they adopt for pensions accounting at 31 July to mitigate the effect of an increase in deficit.”
Despite this predicted rise in liabilties, SATs have actually experienced a year of ‘relative stability’ according to the 6th annual survey of SATs conducted by Barnett Waddingham .
Results from the 2014 Survey show:
-
Average funding level for universities is approximately 81% (83% in 2013)
-
SAT pension deficits remain unchanged from 2013, representing an average of 8% of the net assets of the university (excluding the SAT pension deficit)
-
Contributions to SATs, which cover only non-academic employees, represent an average of 3.6% of total staff costs (3.3% in 2013)
-
Most universities in the survey explicitly disclosed a Consumer Price Index (“CPI”) inflation assumption, implying that 26 of the 35 universities surveyed use CPI as a measure of future inflation for at least some of the increases applied to benefits
-
Average real salary growth assumption fell by 0.2% p.a. in 2014 compared to 2013
-
Average equity weighting is 58%, a 4% reduction from the 2013 average of 62%
Nick Griggs said:
“Our latest survey on University SATs actually shows a period of stability up to 31 July 2014. Unfortunately corporate bond yields have since plummeted and Universities could see a significant leap in their SAT accounting liabilities. With the uncertain economic outlook, funding positions and investment strategies of these pension schemes should continue to be monitored. Market volatility also remains a particularly significant risk to SATs given their higher than average exposure to equities.”
Full survey can be viewed on the link below
|
