KPMG’s Pensions Accounting Survey...

KPMG’s Pensions

Accounting Survey 2014 An analysis of market

trends in pension assumptions

April 2014

kpmg.co.uk

http://www.kpmg.co.uk

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

conTEnTS Section /1

A LooK BAcK AT 2013

Section / 2

KEy hEAdLInES 4

Section / 3

chAnGES T o AccouTInG STAndArdS 6

Section / 4

InfLATIon 8

Section / 5

dIScounT rATE 12

Section / 6

ExPEcTEd rETurn on ASSETS 16

Section / 7

1

MorTALITy 18

KPMG’s Pensions Accounting Survey 2014 – 1 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Section/TWOSection/TWO

1 A LooK B AcK AT 2013

KPMG’S PenSIonS ACCoUnTInG SURvey 2014 LooKS AT T RenDS I n ACCoUnTInG A SSUMPTIonS bASeD on THe exPeRIenCe oF 295 oF KPMG’S C LIenTS W ITH UK DeFIneD beneFIT obLIGATIonS R ePoRTInG U nDeR IFRS, UK oR US GAAP AT 31 DeCeMbeR 2013. THe SURvey CoveRS C LIenTS A DvISeD by ALL T He MAJoR A CTUARIAL ConSULTAnCIeS A nD P RovIDeS A D eTAILeD I nSIGHT I nTo MARKeT-WIDe PRACTICe.

Many UK companies will have seen balance sheets improve over 2013 as strong asset growth offset slightly tighter real discount rate assumptions. Despite these improvements, balance sheets remain significantly exposed to pension risk, highlighted by the volatility seen across the year. Therefore adopting the right risk mitigation strategies, on both asset and liability sides, is key. The choice of assumptions remains as important as ever, and influences not simply the company balance sheet but also pension strategy such as the impact of implementing benefit changes or member options. The market insight from KPMG’s survey can help companies understand the factors at play underlying each choice of assumption. In this survey we also highlight some relatively new approaches to assumption setting, such as the variations around the discount rate methods discussed on page 14.

Changes to IAS 19 have now been adopted by all calendar year reporters, meaning most will have seen a jump up in P&L charges for 2013 due to the new requirements. Companies have also had to disclose more information this year to meet the new requirements around the risk and uncertainty caused by pensions on the sponsor, and expanded sensitivity requirements on the key assumptions. In each key area we have looked at, our analysis shows that the market is more closely packed around the median than it was in our survey last year.

• For example, 61% of reporters used a discount rate within 15 basis points of median last year, with the figure climbing to 81% this year. However, we believe that part of this effect is due to the changing shape (flattening) of the AA yield curve

• Whereas 65% of reporters were within 15 basis points of the median assumed RPI assumption last year, the corresponding figure has risen to 75% this year

• The trend in life expectancy is slightly less pronounced, but still over 80% of reporters are using life expectancies within a 3 year range, up 4%

Part of this apparent trend may be linked to the increased size of pension liabilities versus market capitalisations, and therefore increased scrutiny from auditors, shareholders and analysts on the disclosures. Please see pages 8, 11 and 17.

Changes to UK GAAP will come into effect from 1 January 2015, largely aligning pensions reporting with IAS19R. The change to the way deficits must be reported for group and multi-employer plans may see some companies facing issues around distributable reserves or dividend payments. We discuss the key things to consider on page 6.

2 KPMG’s Pensions Accounting Survey 2014 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

LIAbILITy MoveMenTS Real discount rates, based on the difference between A A corporate bond yields and assumed RPI inflation, reached a new low over 2013, hitting as low as 0.5% in April 2013 and finishing the year at closer to 1.1%. The corresponding rate just before the financial crisis was 3.3%. This, together with additional interest and benefit accrual, means that gross pension liabilities are at their historic high. Measured over the period since the start of the financial crisis in January 2008, UK pension liabilities calculated on an IFRS basis have increased by over 65%.

ASSeT MoveMenTS Due to stellar asset performance, assets have also grown to counterbalance the soaring liability values. For example, over 2013 the assets returns on various asset classes were as follows:

• UK equities returned 20%

• Global equities did even better at 25%

• Bonds didn’t fare as well over the year with conventional gilts making a small loss of just over 5%

• Corporate bonds outperformed fixed-interest gilts producing relatively flat returns

• Index linked gilts outperformed conventional gilts after inflation concerns were stoked by the onS investigation providing a return of around 2%

Since the start of the financial crisis in 2008, 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 45% including reinvestment of dividends and coupons.

So WHAT DoeS THIS MeAn? With gross assets and liabilities at historic highs, deficits are highly geared.

Without a significant level of hedging of risk, a shock to the financial system could leave schemes nursing significant losses.

–

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG KPMG’s Pensions Accounting Survey 2014 – 3network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Purple line

Orange line

Red area

2005

Red area

FUSION

KPMG has developed an online pensions analytic and modelling tool called KPMG Fusion which aides sponsors and trustees in their ongoing monitoring and decision-making responsibilities. Fusion is capable of modelling the cost and risk impact of pensions solutions in real time, enabling

sponsors and trustees to spot opportunities and seize them when the time is right. Fusion also produces GA AP accounting disclosures.

www.kpmg.com /uk/fusion

PROJECTION OF ASSETS AND LIABILITIES ON AN A A CORPORATE BOND ACCOUNTING BASIS SOURCE: KPMG FUSION

Large spike in liabilities as net discount rates reached record lows of around 0.5%.

Jump in liabilities following the results of the ONS consultation (Overnight 30 – 40 bps increase in RPI expectations).

0

£500M

£400M

£300M

£200

Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014

-75M

-150M Progression of assets and liabilities based on changes in general market conditions. Actual experience could be different from estimated.

Assets

Liabilities

Deficit

Time Cash Risk Accounting

Balance sheet estimate

£600M £600M

£437M £387M

£400M £400M

£200M £200M

£0 £0

£50.4M

£200M £200M Assets Liabilities Deficit

P&L forecast (1 year from 31/12/2013)

Service cost £4.42M

Scheme expenses £658K

£19.2MInterest charged

Interest credit £17.3M

Total P&L charge £6.98M

£40M £20M £0 £20M £40M

IAS19 (revised)

£4.42M Service cost

£0 Scheme expenses

£19.2M Interest charged

£26.8M Interest credit

£3.2M Total P&L charge

£40M £20M £0 £20M £40M

FRS17

Excludes any one-off accounting events (past service costs, settlements, curtailments etc)

http://www.kpmg.com/uk/fusion


Section / TWO

2 KEy hEAdLInES

FInAnCIAL ASSUMPTIonS

DISCoUnT RATeS HAve RISen FoR THe FIRST TIMe SInCe 2008 AnD THe MeDIAn RATe AT 31 DeCeMbeR 2013 IS 4.50%, CoMPAReD To THe Ibox x oveR 15 yeAR CoRPoRATe bonD InDex vALUe oF 4.42%.

THe MeDIAn RPI-CPI WeDGe MoveD bACK To 1.00% AnD THe MeDIAn InFLATIon RISK PReMIUM ReMAInS STAbLe AT 0.20% AT 31 DeCeMbeR 2013.

MoveMenT In MeDIAn ASSUMPTIonS - SoURCe: KPMG’S PenSIonS ACCoUnTInG SURvey

4 – KPMG’s Pensions Accounting Survey 2014

9.0%

Med

ian

Assu

mpt

ion

(%)

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

7.8%

5.3%

4.8%

2.8%

2.8%

3.0% 3.3%

3.0% 3.6%

2.9% 2.2% 2.3% 2.4%

3.5% 3.1% 3.0%

3.4%

5.1% 5.8% 6.4% 5.7%

5.4% 4.8%

4.4%

4.5%

7.5%

7.8%

7.5% 7.0%

6.8%

7.2%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year ending 31 December

Discount Rate RPI Inflation CPI Inflation Expected Return on Equities

KPMG’s Pensions Accounting Survey 2014 – 5© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

DeMoGRAPHIC ASSUMPTIonS

Median assumed life expectancy has continued to increase for current male pensioners at the same rate as last year. However, future male pensioners’ life expectancy has remained constant with last year, which masks an updated CMI model (2013) producing slightly lower life expectancies compared to 2012, offset by an increased median rate of long term improvement, which now stands at 1.25%, up from 1.00% in our 2013 survey.

Financial services companies have adopted life expectancy assumptions that are on average 1.0 years higher than those adopted within other sectors.

nearly all companies in our sample our now using SAPS base tables (93%) and CMI projections (91%), with the percentages expected to be higher still next year once another year of valuations has passed.

CURRenT PenSIoneRS

30

25

20

15

10

5

0

Life

exp

ecta

ncy

(yea

rs)

2004 2005 2006 2007 2008

Year ending 31 December

2009 2010 2011 2012 2013

18.4 19.5 20.1 21.1 21.7 21.8 21.9 22.1 22.3 22.5

All life expectancies shown for current pensioners are calculated from age 65 for a male currently aged 65.

FUTURe PenSIoneRS

30

25

20

15

10

5

0

Life

exp

ecta

ncy

(yea

rs)

2004 2005 2006 2007 2008Year ending 31 December

2009 2010 2011 2012 2013

19.4 19.8 21.0 22.3 23.1 23.1 23.5 23.7 24.2 24.2

All life expectancies shown for future pensioners are calculated from age 65 for a male currently aged 45.


Section / TWO

3 chAnGES T o AccounTInG S TAndArdS

CHAnGeS T o UK GA AP ARe eFFeCTIve FoR A nnUAL P eRIoDS beGInnInG on oR A FTeR 1 JAnUARy 2015, WITH eARLy ADoPTIon PeRMIT TeD. GRoUPS W ILL H Ave A C HoICe WHeTHeR T o APPLy FRS101 oR FRS102 AT I nDIvIDUAL enTIT y LeveL. WHILST FRS101 ALLoWS C oMPAnIeS T o USe THe SAMe FIGUReS A S U SeD F oR e U-IFRS RePoRTInG, FRS102 IS T He RePLACeMenT F oR UK GA AP. FoR PenSIonS R ePoRTInG, THe CHAnGeS U nDeR boTH FRS101 AnD FRS102 WILL A LIGn WITH T He IAS19R ReqUIReMenTS.

IMPAcT on GrouP PLAnS (whErE PArTIcIPATInG EMPLoyErS ArE undEr coMMon conTroL)

one of the biggest areas of change that will require the most preparation in the lead up to the 2014 year end is the impact on group plans.

Under FRS17, many groups apply the multi-employer exemption in individual accounts, meaning simple cash accounting for pensions. Under the new regime the pension deficit has to sit on at least one individual balance sheet.

booking a pension deficit will reduce net assets and may create issues around distributable reserves or dividend payments. Consideration of an appropriate accounting policy for allocating pensions costs, which can spread the deficit across different companies, can help mitigate these potential issues.

Companies will need to consider the approach they will adopt well in advance of the 2014 year end.

IMPACT oF FRS102 on GRoUP PenSIon PLAnS

Example:

• entities A, b and C are all under common control and participate in a group Db plan

• entity A is “legally responsible” employer of scheme

• Deficit currently 100, P & L cost 10

• A pays 5, b pays 2.5, C pays 2.5 in contributions per annum


Group (IFRS accounting) • Deficit 100 on BS • 10 in P&L

Current FRS 17 multi-employer

accounting

Entity A • 0 on BS • 5 in P & L

Entity B • 0 on BS • 2.5 in P & L

Entity C • 0 on BS • 2.5 in P & L

• Deficit not on individual BS • Cash accounting in P & L

Default accounting under

FRS 101/102

Entity A • 100 on BS • 10 less B/C cash in P & L = 5



• Deficit hits A’s balance sheet • Reduces net assets • Dividend block issue?

Accounting by policy under FRS 101/102

Entity A • 50 on BS • 5 in P & L



• A policy can help to spread deficit • Can mitigate any dividend issue


} } Accounting policy for allocating deficit:

• Consider data sources available: payroll, membership numbers, contributions

• Policy should have substance

• Consider how policy may develop over time (scheme/ membership /corporate events)

• It is an accounting policy, not an agreement with the pension scheme

• Impact on PPF levies / convenant etc needs to be considered

• More radical solutions – changes in principal employer, restructurings?

MuLTI -EMPLoyEr PLAnS (whErE PArTIcIPATInG EMPLoyErS A rE noT undEr coMMon conTroL)

Companies that participate in multi-employer schemes may also see a significant impact on their balance sheets and the level of distributable reserves as they are now required to recognise the present value of agreed deficit contributions. The impact of changes to the Recovery Plan following a

valuation will be recognised in the income statement. Where Recovery Plans are extended or increased, this may lead to significant P&L charges. We anticipate pressure on funding discussions to keep significant changes to a minimum.

TIMELInE

1 JAN 2014 1 JAN 2015 31 DEC 2015 Date of transition for

calendar year repor ters FRS102 applies First year-end

under F RS102

restated results under FRS102 required FRS102 required for this for this period

period

IfrS13 And ThE P oSITIvE I MPAcT on LonGEvITy SwAPS

A number of pension schemes have entered into longevity swaps with insurance companies. These provide protection against future increases in life expectancy.

Longevity swaps are generally accounted for as plan assets under IAS19. Market practice prior to 31 December 2013 has been to use the IAS19 discount rate and mortality basis to discount the net cash-flows under longevity swap contracts. Due to the nature of the contracts, with insurers pricing in prudence and profit margins, the valuation under IAS19 generally resulted in a negative plan asset value at least in the early years of such a contract.

However, with the introduction of IFRS13 Fair Value measurement, longevity swaps are valued under this standard at their fair value rather than using an IAS19 valuation. This has significantly changed the way these contracts are valued. IFRS13 applies for annual periods beginning on or after 1 January 2013. Under this standard, a market-based measurement has to be placed on a longevity swap. This approach will mean at the date of transaction we expect longevity swaps to be measured at zero or close to zero fair value, reflecting the transaction price.

Companies will therefore no longer be recognising a significant negative asset in the balance sheet when they enter into a longevity swap, helping to remove one of the barriers of entering into these transactions.


4 InfLATIon

THe InFL ATIon ASSUMPTIon IS USUALLy THe b ASIS FoR oTHeR Key ASSUMPTIonS SUCH AS FUTURe PenSIon, LonG -TeRM SALARy AnD DeFeRReD RevALUATIon InCReASeS.

LonG-TeRM RPI InFLATIon e xPeCTATIonS HAve InCReASeD ACRoSS ALL DURATIonS SInCe 31 DeCeMbeR 2012, MAInLy ReFLeCTInG THe UnWInDInG o F MARKeT exPeCTATIonS oF CHAnGeS To RPI THAT exISTeD AT DeCeMbeR 2012.

rPI InfLATIon

The graph below shows the shape of the market-implied inflation curve. It remains upward-sloping with a similar slope as at 31 December 2012.

MoveMenT I n InFL ATIon SPoT C URve SoURCe: bAnK oF e nGL AnD

4.0%

Cont

inuo

us ra

te (%

) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%

0.5% 0.0%

Years

31 Dec 2011 31 Dec 2012 31 Dec 2013

3 5 8 10 13 15 18 20 23 25

Perc

enta

ge o

f com

pani

es

33%35%

30% 25% 25%

20% 17% 15% 15%

8%10%

1%5% 1%

0

RPI inflation (nearest 0.1%)

3.3% 3.4% 3.5% 3.6% 3.7%≤3.2% 3.8%


on 10 January 2013, the onS published the results of its consultation into changing the calculation of RPI inflation to reduce or eliminate the formula effects between CPI and RPI. The result was that there would be no change to the calculation of RPI. Prior to this announcement (in particular at 31 December 2012), the market had priced in some of the anticipated impact. Following the announcement that RPI was not to change, market-implied RPI immediately rose by around 0.30%.

The graph shows the distribution of RPI inflation rates adopted by companies at 31 December 2013. The median RPI inflation rate is 3.40% which is 0.40% higher than last year’s median. The range of RPI assumptions used this year has narrowed compared to last year which reflects the reduced uncertainty around RPI this year.


InfLATIon r ISK PrEMIuM (IrP)

An Inflation Risk Premium (IRP) is often applied to reflect the additional risk taken on by holders of fixed interest gilts and / or supply and demand arguments relating to the index-linked gilts market, both of which are argued to keep break-even inflation rates artificially high. Periods of increased inflation volatility can be associated with larger IRPs.

At 31 December 2013, around three quarters of companies applied an IRP adjustment and the median IRP adjustment remains unchanged since 2012 at 0.20%.

45%

40%

35%

30%

25%

10%

0

Perc

enta

ge o

f com

pani

es

20%

15%

5% 4%

19%

40%

26%

11%

0.15% 0.20% 0.25%

Inflation Risk Premium

0.10% 0.30%

cPI InfLATIon

Typical market practice for the CPI inflation assumption is to apply a deduction from the RPI assumption, as a deep market for CPI-linked investments does not yet exist.

The graph below shows the spread of the RPI-CPI “wedge” used by companies as at 31 December 2013 with around half of the companies using a deduction of 1.00%. This clear trend at 31 December 2013 is to be expected following the onS’s announcement on RPI earlier in 2013.

60%

50%

20%

0

Perc

enta

ge o

f com

pani

es

40%

30%

10%

RPI less CPI (nearest 0.1%)

0.7% 0.9%

11%

1.0%

49%

≤0.6%

7% 7%8%

0.8%

18%

≥1.1%

10 – KPMG’s Pensions Accounting Survey 2014 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

PENSION INCREASES

Most schemes have at least some pension benefits linked to inflation capped at 5.00% p.a., which is often known as Limited Price Inflation (LPI). When setting the pension increase assumption, an offset to the price inflation assumption is typically used by many companies. This is done by considering the expected future volatility of price inflation and the extent to which future inflation will be above the cap, giving a long-term level of increases lower than inflation itself.

As inflation rates have increased significantly over the year, long-term inflation expectations are now closer to the cap. Although the median observed adjustment is unchanged from last year at 0.10%, the distribution of the offsets is more positively skewed reflecting higher long-term RPI inflation expectations.

50%

40%

30%

10%

0

Perc

enta

ge o

f com

pani

es

20%

23%26%

4%

40%

6%1%

0.0% 0.1% 0.2% 0.3%

RPI less LPI assumption

-0.10%

SALARY INCREASES

Although the economy appears to be entering a period of recovery and future expectations of employment have improved, there has been a shift in outlook on longer-term real pensionable pay growth in recent years. Over 2013, we have seen more schemes apply a cap to their salary increases or close their scheme to future accrual of benefits in order to reduce uncertainty on this assumption. For example, of the 82 FTSE 100 companies with defined benefit pension

schemes there are only 59 companies which are still open to accrual, with only two of these still offering defined benefit to new employees. 23 of the FTSE 100 have closed to accrual altogether, with the trend expected to continue.

It is typical for schemes to link the level of future salary inflation to the level of expected future price inflation. The median real salary increase remains 0.50% at 31 December 2013.

30%

25%

20%

15%

10%

5%

0%

Perc

enta

ge o

f com

pani

es

0% 0.1%-0.5% 0.6%-1.0% 1.1%-1.5% 1.6%-2.0% 2.1%-2.5%

Real salary growth rate (above RPI)

20%

35%

40%35%

33%

8%

3%1%

KPMG’s Pensions Accounting Survey 2014 11 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

–


Section / TWO

5 dIScounT rATE

THe DISCoUnT RATe IS USeD To CALCUL ATe THe PReSenT vALUe o F FUTURe LIAbILITIeS In A SCHeMe.

A A CoRPoRATe b onD yIeLDS HAve InCReASeD oveR THe y eAR AnD THe SHAPe o F THe y IeLD CURve HAS CHAnGeD LeADInG To A CHAnGe In THe DISTRIbUTIon oF DISCoUnT RATeS ADoPTeD by PenSIon SCHeMeS.

The graph below shows the overall distribution of discount rates adopted by companies at 31 December 2013. The median discount rate has increased by 0.10% over the year to 4.50% at 31 December 2013.

There is a much narrower range of assumptions this year with over 80% of companies setting a discount rate assumption within a range of only 0.30%.

35%

30%

13%

1%

31%

5%

28%

22%

Discount rate (nearest 0.1%)

4.2% 4.3% 4.4% 4.5% 4.6% ≥4.7%

Perc

enta

ge o

f com

pani

es

25%

20%

15%

10%

5%

0%



As shown below, unlike the implied inflation curves, A A yield curves have changed shape over 2013 - the A A yield curve at 31 December 2013 has a steeper upward slope until 15 years, before the curve flattens significantly with a slight fall in yields

at longer durations. This compares to an upward sloping curve across all terms at 31 December 2012. All else being equal, discount rates for mature schemes are likely to have risen whilst those for less mature schemes may have fallen.

A A CoRPoRATe bonD yIeLD C URve SoURCe: MeRRILL LynCH A nD KPMG AnALySIS

6.00%

3.00%

2.00%

1.00%

0.0% 0 10 20 30 40 50

4.00%

5.00%

31 Dec 2012 31 Dec 2013

Term (years)

Yiel

d

The yield on the iboxx Sterling A A Corporate over 15 year index, which has a duration of around 13 years, has increased by 0.35% over the year from 4.07% to 4.42%. However, as schemes are moving away from discount rate approaches

based on an index (around 25%) to yield curve approaches (around 75%), the index yield movement is no longer an accurate measure of how actual assumptions have changed.


Section / TWO

We ARe ALSo InCReASInGLy SeeInG DIFFeRenT USeS oF THe yIeLD CURve WHen SeT TInG THe DISCoUnT RATe ASSUMPTIon UnDeR IAS19R. We DeSCRIbe SoMe oF THe MeTHoDS beLoW, ALonG WITH oUR vIeWS on THeIR SUITAbILIT y UnDeR IAS19R.

SPLIT dIScounT rATE – PAST S ErvIcE T rAnchES

concept value liabilities using different discount rates derived from the same yield curve for different categories of pension scheme members (or even by individual members or cashflow).

For example, a different discount rate assumption could be adopted to value pensioner liabilities and nonpensioner liabilities.

Benefits Potentially reduces the net liability on the balance sheet for schemes holding annuities to match some of their benefit outgo, as a higher value is placed on the annuity asset when the yield curve is upward sloping.

our view Acceptable and in line with IAS19, subject to clear disclosures.

SPLIT dIScounT rATE – PAST A nd fuTurE S ErvIcE

concept value service cost using long end of yield curve, reflecting long dated liabilities still accruing.

Benefits Lower service cost within the P& L when the yield curve is upwards sloping.

our view Acceptable and in line with IAS19, subject to clear disclosures.

ThE vEcTor APProAch

concept The yield curve is based on a sequence of forward rates across the full term of the liabilities. Interest cost is calculated using the one year forward interest rate.

Benefits Lower interest cost in the P&L when the yield curve is upwards sloping.

our view not compliant with IAS 19. Furthermore, our understanding is that none of the major audit firms have agreed to the use of the vector approach.

note: The views above are general views. Any accounting treatments and methodologies should be discussed with your auditor in the usual way.


KPMG’s Pensions Accounting Survey 2014 15 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The graph below shows the discount rates used by schemes grouped by the duration of their liabilities, showing 2012 and 2013 separately. Reflecting the shape of the yield curve, the

typical discount rates for more mature (shorter dated) plans have increased by up to 10 basis points, whilst the rates for immature (longer dated) plans are down slightly.

Mea

n di

scou

nt ra

te

4.70%

4.60%

4.50%

4.40%

4.30%

4.20%

4.10% ≤15 16-17 18-19 20-21 22-23 24-25 ≥26

Duration (years)

4.33% 4.41%

4.37%

4.47% 4.42%

4.50% 4.44%

4.54% 4.54% 4.53% 4.62%

4.57%

4.67% 4.65%

31 Dec 2012 31 Dec 2013

The graph below shows the distribution of the real discount rate as at 31 December 2013 in beige, with the corresponding distribution at 31 December 2012 in blue. The value placed on the liabilities is most sensitive to

the difference between the discount rate and inflation assumptions (the net discount rate) rather than the nominal value of each. The chart shows a clear shift in net rates from 2012 to 2013 with the median net discount rate falling from 1.50% at 31 December 2012 to 1.10% at 31 December 2013.

Perc

enta

ge o

f com

pani

es

30%

25%

20%

15%

10%

5%

0% ≤0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.5% 1.6% 1.7% 1.8% ≥1.9%

Net discount rate (nearest 0.1%)

1%

17%

11%

19%

23%

6%

15%

7%

1%

15%

9%

4% 2%

11% 13%

2%

16%

1%

27%

31 Dec 2013 31 Dec 2012

Schemes with inflation-linked liabilities will have seen a higher increase to liabilities compared to schemes with fixed liabilities. This is due to an increase in the inflation assumption which has only been partly offset by the increase in the discount rate.

–


Section/TWO

6 ExPEcTEd rETurn on ASSETS

CoMPAnIeS RePoRTInG UnDeR IAS19R no LonGeR ReqUIRe An e xPeCTeD ReTURn o n ASSeTS ASSUMPTIon. HoWeveR, DISCLoSUReS UnDeR UK GAAP STILL ReqUIRe THIS ASSUMPTIon.

EquITIES

Global equity markets performed strongly over 2013, with many leading indices reaching record highs and delivering double-digit annual returns. As shown on the graph below, most of the growth in 2013 is attributable to q1 when markets rallied strongly. Returns over q2 and q3 were slightly muted due to uncertainty around quantitative easing

tapering. However, q4 saw economic data for the UK and US improve supported by improving signs of economic recovery, as investors reacted calmly to US tapering announcements and the bank of england’s pledge to keep interest rates low.

MoveMenT I n eqUITy ReTURn InDICAToRS SoURCe: FTSe

5500

4000

3500

3000

2000

31 Dec

13

4500

5000

2500

6000

FTSE All Share Total Return Index Dividend Yield

FTSE

All

Shar

e To

tal R

etur

n In

dex

4

2

1.5

1

0

2.5

3.5

0.5

4.5

Divi

dend

Yie

ld (%

)

31 Dec

13

30 Ju

n 13

31 Dec

12

30 Ju

n 12

31 Dec

11

30 Ju

n 11

31 Dec

10

30 Ju

n 10

31 Dec

09



30%

25%

20%

15%

10%

5%

0%

Perc

enta

ge o

f com

pani

es

≤6.0% 6.1-6.5% 6.6-7.0% 7.1-7.5% 7.6-8.0% >8.0%

8%

35%

13%

22% 24%

29%

4% The median assumed long term expected return on equities assumption has increased by 0.40% since last year to 7.2% at 31 December 2013.

Expected return on equities (nearest 0.1%)

corPorATE BondS

MoveMenT I n GILT A nD C oRPoRATe bonD yIeLD I nDICATIonS. SoURCe: Iboxx AnD FTSe

31 Dec

09

30 Ju

n 10

31 Dec

10

30 Ju

n 11

31 Dec

11

30 Ju

n 12

31 Dec

12

30 Ju

n 13

31 Dec

13

31 Dec

13

7

6

Ann

ual Y

ield

(%) 5

4

3

2

1

0

FTSE Ov er 15 y ear s gilt yield

iBoxx Corpor a te Ov er 15 y ear s AA Index Y ield

Corporate bonds outperformed gilts throughout the year as investor optimism lent support to risk appetites and credit spreads narrowed. As seen on the graph above, AA index yields have increased by around 0.35% over the year and credit spreads have reduced by around 0.3% to around 0.80% at 31 December 2013.

The median assumed long term expected return on corporate bonds is 0.10% below the discount rate and has decreased by around 0.30% since last year.

KPMG’s Pensions Accounting Survey 2014 – 17


Section / TWO

7 MorTALITy

AS exPeCTATIonS oF FUTURe IMPRoveMenTS In LIFe e xPeCTAnCy ConTInUe To e voLve, THIS ASSUMPTIon ReMAInS Key In THe LIAbILIT y CALCUL ATIon. MeDIAn ASSUMeD LIFe e xPeCTAnCIeS HAve InCReASeD FoR CURRenT MALe PenSIoneRS by 0.2 yeARS, HoWeveR THe LIFe e xPeCTAnCy FoR FUTURe PenSIoneRS ReMAInS FL AT FRoM LAST yeAR. THe GRAPHS oveR THe n ex T PAGeS SHoW THe RAnGe AnD SPReAD oF LIFe e xPeCTAnCy ASSUMPTIonS USeD by CoMPAnIeS RePoRTInG AT 31 DeCeMbeR 2013.

currEnT PEnSIonErS

Perc

enta

ge o

f com

pani

es

45% 39% 40%

35%

30% 26%

25% 18%

20%

15% 11%

10% 4% 5% 1% 1%

0 21 22 23 24 25

Expected future lifetime (nearest year)

≥26 ≤20

All life expectancies shown for current pensioners are calculated from age 65 for a male currently aged 65.

fuTurE PEnSIonErS

Perc

enta

ge o

f com

pani

es

38% 40%

35%

30%

25% 21% 21%

20%

15% 10%

10% 6% 3%

1%5%

0 23 24 25 26 27

Expected future lifetime (nearest year)

≥28 ≤22

All life expectancies shown for future pensioners are calculated from age 65 for a male currently aged 45.

The graphs above show the spread of life expectancy assumptions used by companies for their current and future pensioners. A current pensioner aged 65 is expected to survive 22.5 years on average, whereas a future pensioner

aged 45 now is expected to survive 24.2 years from the age of 65.

Financial services life expectancies tend to be around 1.0 years longer than other sectors.



BASE TABLES

There is a clear trend of companies adopting the SAPS tables (93%) and CMI future long-term improvements (91%) as at 31 December 2013. SAPS tables more accurately reflect actual pension scheme experience rather than life insurance tables such as PA92 and PA00.

2% of companies are using Club vita mortality.

fuTurE IMProvEMEnTS

Although the assumption for future improvements in life expectancy has generally strengthened over the last few years, we have seen a decrease in the gap between current and future pensioner life expectancy this year. The median gap has fallen from 1.9 years at 31 December 2012 to 1.75 years at 31 December 2013 for a 20 year projection.

This is made up of two separate effects – a general update to the CMI model year (e.g. moving to 2013, which reduces life expectancy), and an increased median rate of long term improvement, which now stands at 1.25%, up from 1.00% in our 2013 survey.

40

35

30

20

25

15

10

0

Perc

enta

ge o

f com

pani

es

5

2.6 - 3.02.1 - 2.51.6 - 2.01.1 - 1.50.5 - 1.0

Allowance for future improvement (nearest 0.1 years)

3%3%

39%

32%

19%

3%1%

<0.5

45

>3.0

KPMG’s Pensions Accounting Survey 2014 – 19

CMI 2009, 8% (17%)

CMI 2010, 16% (20%)

CMI 2011, 30% (63%)

CMI 2012, 10% (0%)

CMI 2013, 36% (n/a)

CMI 1%, 36% (36%)

CMI 1.25%, 39% (39%)

CMI 1.5%, 20% (18%)

CMI 1.75%,2% (3%)

Other, 2% (4%)

CMI 0.75%,1% (0%)

91% of companies are using CMI projections for future improvements compared to 69% last year, as the previous interim cohort projections are phased out.

Around a third of the schemes are using the CMI 2013 model year for their year-end accounting results. overall, moving from the 2012 model to the 2013 model reduces

CMI FUTURe IMPRoveMenTS (2012 In bRACKeTS) SoURCe: KPMG AnALySIS

CMI 0.75%, 1% (0%)

CMI 1.75%, 2% (3%)

Other, 2% (4%)

CMI 1.5%, 20% (18%)

CMI 1%, 36% (36%)

CMI 1.25%, 39% (39%)

liabilities by around 1% for a typical scheme, but with pronounced effects for schemes with large weightings to older pensioner liabilities.

Around 40% of schemes used the median long-term future improvement rate of 1.25% with a range of 0.5% to 2.0%.

CMI MoDeL yeAR (2012 In bRACKeTS ) SoURCe: KPMG AnALySIS

CMI 2009, 8% (17%)

CMI 2013, CMI 2010, 36% (n/a) 16% (20%)

CMI 2012, CMI 2011,10% (0%) 30% (63%)

Around 40% of schemes used the median long-term future improvement rate of 1.25% with a range of 0.5% to 2.0%.

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 20 – KPMG’s Pensions Accounting Survey 2014

IF yoU ARe InTeReSTeD In DISCUSSInG THe KPMG DATAbASe AnD HoW IT CoULD ASSIST yoU, PLeASe ConTACT:

London narayan Peralta T: +44 ( 0 )20 7311 2403 E : [email protected]

norTh David bunkle T: +44 ( 0 ) 113 231 3529 E : david.bunkle@ kpmg.co.uk

SouTh Andrew Coles T: +44 ( 0 )118 373 1390 E : andrew.coles @ kpmg.co.uk

MIdLAndS David Fripp T: +44( 0 )121 609 6005 E : david.fripp @ kpmg.co.uk

ScoTLAnd Donald Fleming T: +44( 0 )141 300 5784 E : donald.fleming @ kpmg.co.uk

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG europe LLP and a member firm of the KPMG KPMG’s Pensions Accounting Survey 2014 – 21network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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www.kpmg.co.uk

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. no one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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