Pensions accounting trends

Current pensions accounting developments

Market movements over the quarter

UK equities continued their strong performance in the second quarter of 2024, with the FTSE 100 reaching a new all-time high in May. The FTSE All Share Total Return Index gained 3.7% over the quarter, comparable to the 3.6% rise in the first quarter: it is now 13% up on a year ago.

Bond yields rose over the quarter as markets revised their expectations of interest rate cuts over concerns around inflation data, despite inflation continuing to fall (see below). Yields on UK government bonds and high quality corporate bonds ended the quarter up by c. 0.25% p.a. and c. 0.35% p.a. respectively, leading to a c. 0.10% p.a. increase in implied credit spreads.

Long-term inflation expectations decreased slightly over the last quarter.

Strong equity performance, rising bond yields and the small drop in inflation expectations helped to keep the aggregate ‘buyout’ surplus of the UK’s 5,000 corporate defined benefit pension schemes at a healthy £260bn, as estimated by PwC.

UK inflation update

Annual UK inflation fell over the quarter, from 4.3% and 3.2% in March 2024 to 3.0% and 2.0% in May 2024 for RPI and CPI inflation respectively. Despite CPI inflation hitting the Bank of England (‘BoE’) target of 2% (for the first time since July 2021), the BoE maintained the base rate at 5.25%, noting that monetary policy will need to ‘remain restrictive for sufficiently long’ for inflation to return to the 2% target sustainably in the medium term.

Mortality update (“CMI 2023”)

The latest version of the Continuous Mortality Projections model (CMI 2023) was released on 18 April. The CMI chose to adopt a core weighting parameter of 15%, applied to mortality experience in both 2022 and 2023 (with no weighting applied to either 2020 or 2021, as before), against a backdrop of falling mortality rates during 2023 and early 2024, and a range of views offered by the actuarial profession.

Moving from the core CMI 2022 model to the core CMI 2023 model is expected to lead to a small reduction in liabilities. Companies will need to decide whether to use the core model parameters or use alternative parameters having considered the views of their actuarial advisors. Auditors will likely require evidence to support a company’s choice of parameters.

Appeal hearing in the Virgin Media case

The Court of Appeal heard the arguments in relation to the June 2023 High Court ruling (Virgin Media Limited v NTL Pension Trustees II Limited) on 26 and 27 June 2024. The accounting implications of the appeal will need to be considered by companies when the judgment is known, although it’s not currently clear when the judgment will be published, i.e. before or after the court recess. Companies may be expected to provide appropriate disclosure on this issue, in particular reflecting any uncertainties.

Observed market practice on pensions accounting assumptions at 30 June 2024