KPMG's Pensions Accounting Survey 2018

40 Pages·2017·5.82 MB·English

KPMG’s
Pensions
Accounting
Survey 2018
An insight into market trends
at 31 December 2017
May 2018
kpmg.com/uk
Introduction Key
Contents headlines
4 6
A look back A look ahead to
to 2017 2018 and beyond
10 14
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Discount Infation
rate
22 26
Mortality Contact us
34 40
KPMG’s Pensions Accounting Survey 2018 3
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Introduction
KPMG’s Pensions Accounting Survey 2018 looks at trends in
best-estimate assumptions based on 230 of KPMG’s clients
with UK Defned Beneft (DB) pension schemes reporting
under IFRS, UK GAAP or US GAAP at 31 December 2017.
Our data sample spans the whole of the market, including
companies who are advised by all the leading consultancies.
This enables us to provide a detailed insight into market-wide
practice helping discussions that go beyond accounting.
Following on from the signifcant This led to investors revising their
volatility experienced across the expectations of the pace of future
economy in the previous year, increases downwards, driving down
2017 was much more stable. High the bond yields.
infation, driven by depreciating
sterling, and the UK’s looming However corporate bond yields
departure from the EU, have taken recovered, and fnished the year
their toll on the economy with the only slightly lower than at the start.
lowest annual growth in fve years. These lower yields would generally
have increased pension scheme
Despite this, for the frst time in liabilities relative to last year.
more than a decade, the Bank of
England increased its benchmark Asset returns were not as strong
interest rate. This increase of as 2016. UK equities performed
0.25% returned interest rates relatively well returning 13%
to levels seen before the over the year. On the other hand
announcement of the UK vote to corporate bonds only returned 3%,
leave the EU in 2016. It is hoped a noticeable decrease compared to
that this will help to bring infation 12% in 2016.
back down to the 2% p.a. target. The effect on individual pension
As the rise in interest rates had scheme balance sheets would
already been largely priced into the depend on the types of assets held,
market, it was slightly surprising and the level of hedging in place.
that this was followed by a minor
fall in the longer term bond yields
relevant for pension schemes. This
was driven by a statement made by
Mark Carney, Governor of the Bank
of England, that future rate rises
would be ‘gradual’ and ‘limited’.
4 Pensions Accounting Survey 2018
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Financial headlines
Median net discount rates (measured as • A round 90% of companies surveyed
the difference between the discount rate had a discount rate assumption within
and RPI infation) are negative for the 0.1% of the median refecting the fat
second consecutive year. 2016 was the shape of the yield curve, with only small
frst time we saw negative net discount differences for different durations.
rates since our survey began and this
• T he range of discount rate assumptions
trend is continuing with net rates
adopted has decreased from 0.8% last
shifting even further downwards.
year to 0.5% this year.
• The median discount rate assumption
• L ong term infation expectations
fell from 2.7% last year to 2.5% at 31
have remained stable with a median
December 2017.
assumption of 3.3%.
• D espite a number of companies looking
• T he range of RPI infation assumptions
to alternative approaches to setting their
adopted has decreased from 0.8% last
discount rate assumption, the distribution
year to 0.7% this year.
of assumptions remains closely packed
around the median.

Demographic headlines
Life expectancy assumptions have past three years, these updates have
continued to decrease for the third projected a slowing rate of future
consecutive year. mortality improvements. With 77% of
the companies surveyed adopting the
• The median life expectancy assumption
latest CMI projections at the time (CMI
has fallen by 0.2 years for current
2016), this has resulted in assumed life
pensioners, and 0.6 years for future
expectancies falling.
pensioners.
• Despite the signifcant transfer value
• The Continuous Mortality Investigation
activity seen this year, only 3% of
Bureau (CMIB) continually updates its
companies surveyed have included an
research and produces annual updates
explicit assumption in their accounts
of the CMI projection model. For the
around future transfer expectations.
Looking ahead
There are a number of issues which • The changes to the way service cost will
could affect companies during 2018 and be presented under US GAAP published
beyond, including: by the Financial Accounting Standards
Board (FASB).
• The decision of the International
Accounting Standards Board (IASB) to • The changes to how the IAS 19
revise its proposed changes to IFRIC 14. pension expense is calculated after the
occurrence of a special event.
• The Financial Reporting Council’s (FRC)
review into best practice for pension We explore these issues and more on
disclosure notes. pages 14 to 21.
• The variations in the approach to setting
the discount rate assumption.
Pensions Accounting Survey 2018
5
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Section 1
Key headlines
Financial assumptions

Real AA discount rates have fallen
slightly at -0.8% compared to -0.7%
last year.
• The median discount rate at 31 December 2017 was
2.50%. This refects a decrease of 0.20% compared to
the median last year.
• The median RPI infation rate was 3.30% at 31 December
2017 (in line with the median rate last year).
• The median CPI infation assumption adjustment and
infation risk premium also remained unchanged from
the previous year at 1.00% and 0.20% respectively.
Movement in Median Assumptions
7.0% 6.40%
5.80%
6.0% 5.30% 5.40%
Discou4n.t8 0ra%te RPI in5f.7a0ti%on 4.80% CPI infation
Source: KPMG analy5s.i0s% 5.10% 4.40%4.50%
4.0%
2.80% 3.30% 3.60%3.50%3.10% 3.40% 3.603%.103%.80%3.30% 3.30%
3.0%
2.80% 3.00% 3.00% 2.90% 3.00% 3.10% 2.70% 2.50%
2.0% 2.20%2.30%2.40%2.10% 2.10%2.30%2.30%
1.0%
0.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year ending 31 December
Discount Rate RPI Inflation CPI inflation
Source: KPMG analysis
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Median Assumption (%)
Demographic assumptions
Median assumed life expectancies
have decreased by 0.2 years for
current pensioners and by 0.6 years
for future pensioners.
• The trend of falling life expectancies seen over
the past three years has continued. This is due to
the slowing rate of future mortality improvements
projected by the Continuous Mortality Investigation
Bureau (CMIB) over the past three years.
Movement in the life expectancies
25 24.2 24.2 24.2 24.2 24.1
23.5 23.7 23.5
23.1 23.1
23 22.3
21.0
21.7 21.8 21.9 22.1 22.3 22.5 22.6 22.4 22.3 22.1
21
19.8 21.1
19.4
20.1
19 19.5
18.4
17
15
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year ending 31 December
Future Pensioner (currently aged 45) Current Pensioner (currently aged 65)
Source: KPMG analysis
KPMG’s Pensions Accounting Survey 2018 7
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Median Life Exoectancy (years)
Section 1
Key headlines (continued)
Overall strength of fnancial assumptions adopted
3.90%
3.80%
3.70%
Prudent
3.60%
3.50%
Optimistic
3.40%
2.10% 2.20% 2.30% 2.40% 3.320.%50% 2.60% 2.70% 2.80% 2 3 4 5
3.20%
This size bubble
represents 10 companies
3.10%
3.00%
Source: KPMG analysis Inflation
The bubble chart above shows the discount rate Given the fat shape of the corporate bond curves
assumption plotted against the corresponding RPI and the infation curves this year there is less
infation assumption adopted by each company in variation in assumptions by duration. This has
our data sample. The size of the bubble indicates the resulted in the majority of companies being very
number of companies adopting those assumptions. tightly packed around the median. The graph shows
around two thirds of companies are within the
The axes cross at the median discount rate and RPI central square that sits within 0.1% of both the
infation assumption. Therefore, companies who are median discount rate and the median RPI infation
in the bottom right square are adopting assumptions assumptions. Outside of this square there are
that are more optimistic than the median, and slightly more companies towards the optimistic end
companies who are in the top left square are of the chart.
adopting assumptions that are more prudent than
the median.
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Discount rate
Around two thirds of companies are adopting both
discount rates and RPI infation assumption within
0.1% of the median.
KPMG’s Pensions Accounting Survey 2018
9
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Section 2
A look back to 2017
2017 was a relatively stable year for pension schemes,
especially compared to the marked volatility experienced
during 2016. Many schemes would have fnished off the
year with balance sheet positions similar to that at the
start of the year, although this will vary depending on
the asset mix schemes held.
Low bond yields and increased pensions freedoms,
which came into effect during 2015, have resulted in an
increase in the number of members opting to transfer
their benefts out of DB schemes. It is estimated that
since April 2015, around £50bn has been transferred out
of private sector DB schemes.
Despite this, 97% of companies surveyed have not
adopted an explicit assumption about expectations for
future transfers out of their schemes. Limited scheme
experience data and uncertainty around whether the
recent high transfer activity is likely to be a continued
trend has left most companies opting to hold off from
making an explicit assumption within their accounts.
10 KPMG’s Pensions Accounting Survey 2018
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.