Business Finance: Pension liabilities remain an issue for employers, says Linda Ellett

Linda Ellett KPMG

Linda Ellett KPMG - Credit: Archant

Despite strong performance across most asset classes since the 2008 financial crisis, falling yields on high quality investments have meant that increases in pension liabilities have still managed to outpace the growth in pension fund assets, according to KPMG’s 2013 Pensions Accounting Survey.

The 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.

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.

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.


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Recent changes to accounting rules and forthcoming changes to UK Generally Accepted Accounting Practice (UK GAAP) only act to bring more attention to the issue.

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.

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So despite 2013 delivering a strong performance across a range of asset classes, corporate balance sheets are still significantly exposed to pension risk.

Fortunately the industry is working hard to help both trustees and employers manage these liabilities with significant innovations in recent years in the areas of risk management and asset-backed financing.

Further, the additional objective that the pension regulator will be given will enable trustees and employers who are looking to be reasonable reach pragmatic financing solutions.

KPMG’s 2013 Pensions Accounting Survey is available at www.kpmg.com .

: : Linda Ellett is head of pensions for KPMG in East Anglia.

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