Pensions - Articles - Discount rates may not be mirrored in scheme funding


Analysis released by Punter Southall shows that discount rates used for accounting are likely to have increased over 2015 more than corresponding discount rates for funding purposes.

 Releasing its latest Corporate Bulletin, the firm found that corporate bond yields across all terms have increased by around 0.3% pa over the year ending December 2015 and the discount rates used by corporates to calculate pension scheme deficits will correspondingly increase. Punter Southall estimates an average discount rate of around 3.9% pa, compared to a range of 3.5% - 3.7% pa for the previous year.

 However, the improvement in accounting deficits for many schemes as a result of the higher discount rates will have been dampened by low asset returns. The same analysis found that many assets classes returned close to zero over the course of 2015. Overall, accounting deficits will still likely have improved between 31 December 2014 and 31 December 2015.

 The firm also cautioned that scheme funding positions as set by trustees to determine contribution requirements may not necessarily have improved by the same degree and may have worsened. This is because most schemes set funding discount rates with reference to gilt yields which have not increased by the same margin as corporate bond yields over the year.

 Commenting on the findings, Craig Wootton Head of Corporate Services at Punter Southall, said: “An increase in the level of corporate bond yields is positive news for pension scheme accounting deficits and for company balance sheets. Where a discount rate is likely to fall depends on the duration of the scheme’s liabilities, but we’re predicting an increase in discount rates of around 0.3% pa for most corporates relative to last year.

 “Investment returns over the year to 31 December 2015 have been unimpressive with many asset classes having returned close to zero. However, as corporate bond yields have increased over the year, balance sheet positions may have improved.

 “The corresponding increase in gilt yields has been slightly lower. Any improvement seen in the accounting position may therefore not translate into an improvement in other measures such as scheme funding.”
  

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