Some 96% of FTSE 100 companies increased the discount rate they use when applying IAS 19, Employee Benefits, at 31 December 2012 relative to the yield on a long-term AA bond index.
This was the principal finding of pension consultancy Barnett Waddingham’s annual survey of the FTSE 100.
The survey, which is in its 12th year, focuses on the assumptions adopted by FTSE 100 companies for determining the value of their pension liabilities for accounting purposes.
According to the research, the average IAS 19 funding level in the FTSE 100 was approximately 89% in 2012 (the same as in 2011), while the average retail price index inflation assumption adopted by companies in the survey was 3.0% per annum compared with 3.1% in 2011.
In addition, the survey found that the average real salary growth assumption dropped to 0.5% in 2012 from 0.7% in 2011, while the average male life expectancy assumption in 2012 increased to 27.4 years for current pensioners (up from 27.1 in 2011), based on a retirement age of 60.
Commenting on the results, Nick Griggs, head of corporate consulting at Barnett Waddingham, said: “The significant fall in corporate bond yields as well as a steepening of the yield curve has meant that companies should carefully consider their approach in setting their discount rate. Many companies will be using an index yield approach, which could mean they are overstating their accounting liabilities.”
Sally Percy is editor of The Treasurer