- Assets do not keep pace with liabilities; life expectancy continues to rise, finds KPMG survey
Despite strong performance across most asset classes since the 2008 financial crisis, falling yields on high quality investments have meant that pension liabilities have still managed to outpace the growth in pension fund assets, finds the 2013 Pensions Accounting Survey from KPMG in the UK.
KPMG’s 2013 Pensions Accounting Survey confirms that, measured over the period since January 2008, UK pension liabilities calculated on an IFRS basis have increased by over 60%. This is due primarily to falling yields on AA corporate bonds, which are used to discount the value of future benefit payments under IFRS.
Over the same period, a typical pension fund portfolio invested in a combination of equities (UK and overseas) and bonds (both government and corporate bonds) is likely to have returned closer to 40% including reinvestment of dividends and coupons.
Naz Peralta, Director in KPMG’s Pensions practice, comments “It’s the now familiar issue that, however well assets perform, pension liabilities seem to grow even more quickly. The issue is the same whether we consider liability measures for company accounts under IFRS, or for cash funding discussions.”
Median real discount rates, i.e. net of RPI inflation, were 1.5% at 31 December 2012, had tumbled further to 1.0% at 31 March 2013 and were nearer 0.8% at 30 April 2013 – the lowest since marked-to-market pensions accounting was introduced. The medians only tell part of the story, with a spread of 1.0% between lowest and highest real discount rates at 31 December 2012 reflecting different liability profiles as well as a range of views being taken by corporates.
As well as falling yields, another driver is the increasing allowance for improvements in future life expectancy, with a current 45 year old expected to live for nearly two years longer once in retirement compared to a current pensioner.
Recent changes to IFRS rules and forthcoming changes to UK Generally Accepted Accounting Practice only act to bring more attention to the issue. Lynn Pearcy, KPMG’s global head of IFRS employee benefits, says “Companies that previously used options available under either IFRS or UK GAAP to not fully reflect pension deficits on balance sheet are now having to accept the new reality. 2013 will see full recognition in IFRS accounts with the implementation of IAS19 Revised, and by 2015 groups will also need to record pension deficits in parent or subsidiary individual accounts under the new UK GAAP, which may affect reserves or, at the extreme, the flow of dividends”.
KPMG’s 2013 Pensions Accounting Survey is available here
Total returns by asset class over the period 1 January 2008 to 30 April 2013
UK equities +26% (FTSE ALL SHARE - TOT RETURN IND)
Global equities +38% (MSCI WORLD - TOT RETURN IND)
Index-linked gilts +58% (FTSE.BRIT.GOVT. IND-LNK.ALL MAT. - TOT RETURN IND)
Fixed interest gilts +44% (FTSE BRIT.GOVT.FIXED ALL STOCKS - TOT RETURN IND)
Corporate bonds +52% (IBOXX £ NON-GILTS 15+ YEARS AA - TOT RETURN IND)
iBoxx AA Sterling over 15 year index yield - 31 December 2007 - 5.82%
iBoxx AA Sterling over 15 year index yield - 31 December 2007 - 3.79%
Assumed life expectancy at age 65 current age 65 (31 December 2007 data) - 21.1 years
Assumed life expectancy at age 65 current age 65 (31 December 2012 data) – 22.3 years
Assumed life expectancy at age 65 current age 45 (31 December 2007 data) – 22.3 years
Assumed life expectancy at age 65 current age 45 (31 December 2012 data) – 24.2 years
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: firstname.lastname@example.org
KPMG Press Office: 0207 694 8773
Notes to editors.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.