KPMG: Pension liabilities climb by 60% over five years

PENSION LIABILITIES continue to outstrip asset performance, despite assets performing well over the period, a survey by KPMG has found. 

According to the KPMG 2013 Pensions Accounting Survey, since January 2008, liabilities calculated on an IFRS basis have increased by more than 10% per year compound, as falling yields on AA corporate bonds continue to affect schemes, Accountancy Age’s sisiter title Professional Pensions reports.

KPMG director of pensions Naz Peralta (pictured) said the survey showed “a very stark increase in gross liabilities for schemes”, although most asset classes had recovered from the financial crash.

He said: “For an average company that may have grown modestly in the last five years, its scheme liabilities have grown by 60%. There’s a lot more exposure to pensions risk.”

The survey found median assumed life expectancy at retirement continued to rise in the year to 31 December 2012, up 0.2% for current male pensioners to 22.3 years.

For future male pensioners this rose by 0.5%, to 24.2 years.

Median discount rates fell by 0.4 percentage points in the same period, to 4.4%. Mature schemes saw a greater drop (0.4pp to 0.5pp) than less mature schemes, which saw falls of around 0.2pp to 0.3pp, as a result of more significant falls in corporate bond yields over shorter durations.

Net discount rates, which are discount rates minus RPI inflation, fell from 1.7% at 31 December 2011 to 1.5% 12 months later.

Peralta said the spread of assumptions, which totaled around 1% for net discount rates used, could produce significant disparities in future.

He explained: “While 1% does not seem a lot, projected over 20 years you could be looking at a 20% variance between two corporates that have taken a different view on what appropriate assumptions should be.”

“Upcoming mark-to-market accounting changes are also likely to have a major impact, as the new UK GAAP and IAS19 Revised will remove the few options there were previously for not fully recognising pension deficits on individual balance sheets,” Peralta said.

Peralta said the results ultimately highlight the need for “continued innovation” in the industry.

He suggested employers explore incentive exercises, such as pensions increase exchange exercises, as well as alternatives to cash deficit contributions, such as asset-backed funding.

Peralta added: “As well as looking at innovative pension solutions, companies must work alongside trustees.

“Trustees need to be onboard for the types of exercises corporates are looking into.”

Related reading