KPMG S PENSIONS ACCOUNTING SURVEY 2015

Transcription

1 KPMG S PENSIONS ACCOUNTING SURVEY 2015 An analysis of market trends in pension assumptions May 2015 kpmg.co.uk turn page

2 introduction KPMG s Pensions Accounting Survey 2015 looks at trends in bestestimate assumptions based on 270 of KPMG s clients with UK Defined Benefit (DB) pension schemes reporting under IFRS, UK or US GAAP at 31 December The survey covers clients advised by leading consultancies and provides a detailed insight into market-wide practice helping discussions that go beyond accounting was a year of great economic uncertainty, particularly with global growth failing to deliver on expectations, falling oil prices and lower inflation. On top of this, the expected date for a UK interest rate increase was pushed back into 2016 or even later, despite the Governor of the Bank of England at one point warning that rates could rise sooner than people think. Persistent low interest rates meant that corporate bond yields were at historic lows at the year end. This was generally bad news for pension schemes. Historic low real yields meant that many companies faced significant increases in pension scheme liabilities at this year end possibly as much as a 10% increase in Q alone. Further, despite equity market rallies and strong fixed income asset performance over the year, for most schemes asset growth was not as strong as the increase in liabilities. This left many companies facing significant balance sheet deficits at the year end. As a result, pension disclosures are likely to continue to attract scrutiny from shareholders and analysts as the pensions exposure has increased as a proportion of overall balance sheets. A LOOK AHEAD TO 2015 AND BEYOND KEY HEADLINES A LOOK BACK TO

3 01 / A LOOK BACK TO Low yield concerns continued into the new year with further falls in bond yields leading to liabilities increasing by a further 5% over the first month of The choice of assumptions remains pivotal in influencing the company balance sheet as well as wider pension risk management strategy such as the accounting impact of implementing benefit changes or member options. KPMG s survey can help companies understand the factors underlying assumptions and highlight current market trends to inform their assumption setting methodology. Our analysis shows a continuation of a trend seen last year with the market being even more closely packed around the median. uufor example 76% of companies surveyed had an inflation assumption within 0.1% of the median, and 76% of companies were within 0.1% of the median discount rate assumption. DISCOUNT RATE 05 INFLATION uuthe median discount rate assumption has fallen from 4.5% last year to 3.6%. The dramatic reduction in bond yields has seen many companies review their methodologies for the discount rate assumption with a view to mitigate some of the impact of falling yields on the balance sheet. Care needs to be taken to ensure that sufficient disclosure is made for any changes. uuthe median assumption for RPI inflation has fallen from 3.4% to 3.1%. Views on RPI inflation appear to be consistent across companies surveyed with a very tightly packed distribution. The 2014 Budget transformed the UK pensions environment and the effects of the Chancellor s statement that no one will have to buy an annuity are likely to have a wide ranging impact for the economy. Employers and Trustees will need to factor the changes into their pension strategy. For Defined Benefit (DB) schemes there is considerable uncertainty about future member behaviour as some members may look to access the new flexibilities by transferring benefits to Defined Contribution (DC) arrangements. Employers will need to consider whether they need to start allowing for anticipated member movements in their liability assessments. We explore this topic in more detail on page 5. Companies reporting under UK GAAP will be reporting under FRS101 or FRS102 from 1 January Many will see a jump in their P&L costs as a result. Sponsors participating in multi-employer schemes or group schemes will have important considerations around the reporting and disclosure of their funding commitments. We discuss the impact of this on page / A LOOK AHEAD TO 2015 AND BEYOND 03 / KEY HEADLINES 04 / DISCOUNT RATE 06 MORTALITY 05 / INFLATION 06 / MORTALITY 2

4 01 a look back to 2014 FUSION SNAPSHOT The chart below based on KPMG s Fusion tool shows how assets and liabilities may have moved for a typical scheme over the year. In such times of economic uncertainty, KPMG s Fusion tool can be invaluable for sponsors wishing to keep track of their pension scheme in real time. It can also provide estimated accounting disclosures which can be vital for planning purposes in a volatile environment was a particularly volatile year for pension schemes as long-dated interest rates fell sharply, leading to an increase in the value of pension scheme liabilities. After a jump in August, the downward trend in corporate bonds yields led to a steady increase in the value being placed on pension liabilities. m The gap between assets and liabilities increased significantly over the year as the upward trend in liabilities was not typically matched by asset performance. Schemes holding matching assets would have seen a smaller impact on the company s accounts. Whilst movements after 31 December 2014 do not have an impact on the financial statements, the continued volatility led to consideration of post-balance sheet disclosures. 300 Sept 2013 Dec 2013 Mar 2014 Jun 2014 Sept 2014 Dec 2014 Mar 2015 Liabilities Purple Assets line Orange line Real yields entered negative territory at the start of Q2 and have yet to rise into positive territory. Equities rallied in Q3 despite the increase in market volatility. Historic low real yield: -0.83% on 12 December

5 01 / A LOOK BACK TO 2014 Yield % p.a. LIABILITIES Both nominal and real discount rates (based on the difference between AA corporate bond yields and assumed RPI inflation) reached a new low over 2014 (highlighted in the chart below). After a volatile jump in August, rates hit a historic low in December significantly increasing the value placed on pension benefits. For a typical scheme with duration of around 20 years, we estimate this meant an increase of just over 20% in the defined benefit obligations over the year, shown in the Fusion Snapshot opposite. This highlights that corporate balance sheets remain significantly exposed to pension risks. AA yields dropped further in early YIELD TRENDS OVER THE YEAR Sep-13 Dec-13 iboxx over 15 year corporates index Mar-14 Jun-14 Merrill Lynch over 15 year corporates index Sep-14 Dec-14 Mar-15 Bank of England implied inflation (20 year) ASSETS The Fusion Snapshot shows assets generally performed well over the year, showing signs of recovery from the global economic downturn. A typical pension scheme invested in a combination of equities and bonds could have seen assets return as much as over the year. This performance was typically not enough to offset the level of increase in liabilities for most schemes. Schemes with a large proportion of assets invested in bonds will have benefited from the flip side of record low yields and be in a better position than most at the end of the year. Typical asset class returns over the year are set out below: uureflecting falls in yields over the year, corporate bonds had a record year returning 21% (IBOXX ALL CORP AA) uugilt yields dropped by a greater amount than corporate bond yields over the year leading to even better returns Conventional gilts returned 26% (FTSE GOVT FIXED INTEREST OVER 15 YRS) Index-linked gilts returned 27% (FTSE GOVT INDEX-LINKED OVER 15 YRS) uuthe Stock market didn t fare quite as well but still provided some strong growth over the year UK equity returned 1% (FTSE ALL SHARE) Global equity returned 12% uuthe UK property market was strong with total returns around 20% over the year (FTSE ALL UK PROPERTY) 02 / A LOOK AHEAD TO 2015 AND BEYOND 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION DEFICITS The extent to which a particular scheme s funding position has been affected by record low interest rates will depend on their investment strategy and particularly the level of hedging in place. For many schemes, the second half of 2014, which was relatively volatile, will have seen increasing deficits and significant changes month on month. This highlights the potential exposure of running a mismatched investment strategy to the company s balance sheet given the nature of accounting figures being at a single point in time. 06 / MORTALITY 4

6 02 a look ahead to 2015 and beyond BUDGET FLEXIBILITY The extra flexibility for DC pension savings arising from the 2014 Budget came into effect from April This means that DB schemes may see an increase in the number of members opting to transfer their benefits out of the scheme to access this flexibility. Corporate reporters need to consider the best-estimate assumption within the accounting results for the proportion of members that are likely to transfer out. The accounting treatment for this would need to be considered carefully. We have not yet seen any companies making an explicit allowance for transfers within the accounts. Most are likely to wait and get a feel for whether there is any impact on member behaviour in practice before making a decision. We anticipate some variety of accounting treatments on the introduction of the new flexibilities, mainly hinging on whether offering a transfer option is deemed to be a plan amendment. In our view, as most members are already entitled to a transfer out under legislation, any transfer made more than a year from retirement would be expected to flow through as a normal benefit payment. Many scheme rules currently restrict members from taking a transfer out of the scheme in the last year before retirement. To allow people to transfer out of the scheme at retirement may therefore require a rule change which would be considered a plan amendment where the impact would flow through the P&L. Our view is that a transfer within 12 months of retirement is likely to flow through P&L if historically the transfer option was only available on a discretionary basis, but there is little past practice and therefore no member expectation of this benefit. Whereas it would flow through OCI if a transfer within 12 months is already available as a right to members. Whether transfers at retirement would lead to a cost or credit within the P&L will be driven by the relative values of accounting liabilities versus transfers paid. Companies may wish to engage with the pension scheme Trustees to review the assumptions used to calculate the transfer values, indeed the Institute and Faculty of Actuaries recently issued some guidance to Scheme Actuaries in this area. The new flexibility has affected different employers and trustee groups in different ways. So KPMG has developed a range of strategies which seek to take advantage of this rare opportunity to provide better outcomes for everyone. From DC scheme review to redesigning the DB At Retirement process and designing robust member options exercises to employee education software, Reshaping Retirement has it covered. Our web page has all the information you need and if we can be of help to you during this radical change to our industry, please do let us know. kpmg.com/uk/reshapingretirement 5

7 01 / A LOOK BACK TO / A LOOK AHEAD TO 2015 AND BEYOND 03 / KEY HEADLINES KPMG PILOT Our technology solution helps your members understand and make the most of the new retirement flexibilities whilst also reducing IFA costs and your governance burden and improving your workforce management. If you d like a demo of our new technology and to discuss how KPMG Pilot could help you, please get in touch. kpmg.com/uk/pilot 04 / DISCOUNT RATE 05 / INFLATION 06 / MORTALITY 6

8 02 UK GAAP The Financial Reporting Council s (FRC) revised UK GAAP is effective from 1 January Under the new regime companies will be able to pick whether to apply FRS101 or FRS102 at individual entity level. Changing the standards for the company s accounts may have wide ranging effects including impacts on taxation and distributable reserves. In advance of the 2015 year end companies will need to ensure they have considered the most appropriate accounting framework which will allow them to mitigate the impact of such effects. TIMELINE J F M A M J J A S O N D J F M A M J J A S O N D 1 JANUARY 2014 Date of transition for calendar year reporters, restated results for FRS102 required over JANUARY 2015 FRS102 applies 31 DECEMBER 2015 First year-end under FRS102, including prior year disclosures The main changes on implementing FRS102 in respect of pension plans are to align the requirements with IAS19 more generally: uumany companies may face increased P&L costs for 2015 because of the replacement of the expected rate of return on assets with the discount rate assumption for determining the income credit. uufor the first time with group schemes at least one participating employer will have to fully account for the pension scheme at individual company level, rather than only in the consolidated accounts. Many groups have until now taken advantage of the multi-employer exemption which allowed them to account for their defined benefit plans in a similar way to defined contribution schemes at subsidiary level. uuunrelated companies participating in multi-employer schemes may continue to account on a defined contribution basis, but they will need to provide for any deficit contributions attributed to them. One difference that remains between FRS102 and IAS19 is the treatment of deficit contributions in situations where the employer may be unable to obtain an economic benefit from them. IAS19 requires an additional liability for the value of any deficit contributions to the extent that payment of those contributions would lead to irrecoverable surplus in the future. An amendment to FRS102 published by the FRC in February 2015 makes it clear that no such additional liability for Defined Benefit accounting is needed under FRS102. FRS101 covers disclosure exemptions from IFRS, but none of the exemptions extend to pension disclosures. Therefore as far as pension reporting is concerned there are no differences between FRS101 and IAS19. FRS102 has fewer pension disclosure requirements than FRS101, principally on the narratives and sensitivities. 7

9 01 / A LOOK BACK TO 2014 VAT ON PENSION COSTS Following the PPG European Court decision and subsequent HMRC guidance, many pension funds are looking at how VAT recovery can be optimised from 2016, particularly on investment related scheme costs. Companies should note that solutions that work from a VAT perspective may give rise to adverse cash, corporate tax and pensions accounting impacts unless the structuring is considered from all of these angles, and we encourage a multi-disciplinary approach to looking at the issue. IFRIC 14 The IFRS Interpretations Committee has been discussing potential changes to IFRIC 14 which could have a major impact on company balance sheets. IFRIC 14 determines the level of a pension scheme s surplus that can be recognised on the Company balance sheet depending on whether the entity is able to get economic benefit from the surplus in the long run. Current debates are underway which may limit the range of circumstances when a company can recognise a surplus. One situation is where the scheme Trustees have the right to improve the scheme benefits without the agreement of the Company. Currently the Company may be recognising a surplus as an asset on the balance sheet when in reality the Trustees could change the benefits of the scheme, removing the surplus entirely. Nothing has been decided on this yet and it will be some time before the committee reach a conclusion. However companies may wish to consider a review of existing Trustee powers within the rules to help identify any issues at an early stage. 02 / A LOOK AHEAD TO 2015 AND BEYOND 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION 06 / MORTALITY 8

10 03 key headlines Real AA discount rates averaged only 0.5% for December reporters, down from 1.1% a year earlier. The median discount rate was 3.60%, compared to the iboxx over 15 year corporate bond index of 3.41%. This reflected a decrease of 0.9% compared to the median last year. The median RPI inflation rate was 3.10% at 31 December The median CPI inflation assumption adjustment and inflation risk premium remained relatively stable compared to previous years. MOVEMENT IN MEDIAN FINANCIAL ASSUMPTIONS Median Assumptions (%) 9% 8% 7% 6% 5% 4% 3% 2% 1% 5.3% 4.8% 2.8% 2.8% 5.1% 3% 7.8% 5.8% 3.3% 7.5% 6.4% 3% 7.8% 5.7% 3.6% 7.5% 5.4% 3.5% 2.9% 7% 4.8% 3.1% 2.2% 6.8% 4.4% 3% 2.3% 7.2% 4.5% 3.4% 2.4% 6.4% 3.6% 3.1% 2.1% 0% Year ending 31 December Expected Return on Equities Discount Rate RPI Inflation CPI inflation 9

11 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 2015 AND BEYOND Median assumed life expectancies remained broadly stable from last year for both current and future pensioners. Almost all companies are now using SAPS mortality tables and CMI projections and this was reflected in a smaller range of implied life expectancies. MOVEMENT IN THE LIFE EXPECTANCIES 04 / DISCOUNT RATE Median Life Expectancy (years) / INFLATION Year ending 31 December Future Pensioners (currently aged 45) Current Pensioners (aged 65) 06 / MORTALITY 10

12 04 discount rate The discount rate is used to calculate the present value of future liabilities in a scheme. We are continuing to see different uses of the yield curve when setting the discount rate assumption. Some companies have become more selective in choosing the bonds in their underlying discount rate curve to remove non-corporate bonds. Another relatively new approach is to include bonds which have been rated as AA by a single rating agency rather than the traditional approach of AA from all agencies. These approaches are acceptable under IFRS and UK GAAP as they still rely on AA high-quality corporate bond yields, although the impact of the change in approach will need to be disclosed for the current year. The yield on the iboxx Sterling AA Corporate Over 15 Year index, which has a duration of around 14 years, has decreased by 1.00% over the year. The graph to the right illustrates how the yield curve has changed shape since last year unlike the implied inflation curve on page 15. Discount rates have fallen at all durations. Yield p.a. AA CORPORATE BOND YIELD CURVES Source: Merryll Lynch and KPMG Analysis 6% 5% 4% 3% 2% 1% 0% Term years 31 December December December

13 The graph to the right shows the overall distribution of discount rates adopted by companies at 31 December The median discount rate is 3.60% at 31 December 2014 and has decreased by 0.90% over the year. THE SPREAD OF DISCOUNT RATES ADOPTED IS SIMILAR TO LAST YEAR WITH AROUND 75% OF COMPANIES ADOPTING AN ASSUMPTION WITHIN 0.10% FROM THE MEDIAN. Percentage of Companies 35% 30% 25% 20% 10% 5% 0% 32% 29% 11% 11% 1% 1% 3.3% 3.4% 3.5% 3.6% 3.7% 3.8% 3.90% Discount rate (nearest 0.1%) 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 2015 AND BEYOND 05 / INFLATION 06 / MORTALITY 12

14 04 The graph below shows the discount rates used by schemes grouped by the duration of their liabilities. This uses our survey sample in 2013 and Discount rates for schemes have fallen over the year by similar amounts for both mature schemes (shorter duration) and immature schemes (longer duration). 5.0% 4.5% 4.41% 4.47% 4.50% 4.54% 4.53% 4.57% 4.65% Mean Discount Rate 4.0% 3.5% 3.0% 3.51% 3.58% 3.65% 3.62% 3.66% 3.64% 3.72% 2.5% December December

15 The fall in discount rates has been only partially offset by the fall in inflation expectations. Our survey shows a clear downward shift in the net discount rate from last year with the median net discount rate falling from 1.10% to 0.50%. Percentage of companies 30% 25% 20% 10% 5% 0% A PENSION SCHEME WITH MAINLY INFLATION-LINKED LIABILITIES WILL HAVE SEEN A LOWER INCREASE TO LIABILITIES COMPARED TO SCHEMES WITH FIXED LIABILITIES DUE TO THE FALL IN IMPLIED INFLATION RATES. 16% 11% 6% 4% 2% 1% 1% 1% 0.1% 0.2% 10% 0.3% 31 December December % 0.4% 28% 18% 17% 19% 0.5% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.5% Net discount rate (nearest 0.1%) 23% 11% 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 2015 AND BEYOND 05 / INFLATION 06 / MORTALITY 14

16 05 inflation The RPI assumption is typically used as a basis to set other assumptions used for pensions accounting such as pensions increases in payment, deferred revaluation and longterm salary growth. Long-term RPI inflation expectations have fallen steadily over the year by around 0.30% across all durations since 31 December Continuous rate The graph below shows the market-implied inflation curve. The shape is broadly unchanged from last year although inflation has fallen across all durations with break-even rates falling by around 30 bps. Inflation expectations have been volatile with long-term rates on a steady decline over most of the year. MOVEMENT IN INFLATION SPOT CURVE Source: Bank of England and KPMG analysis 4.0% 3.0% 2. 0% 1. 0% 0.0% December December December 2014 SOME COMPANIES ARE STARTING TO CONSIDER USING THE NEW RPIJ INDEX FOR PENSION INCREASES. SLOW ADOPTION SEEMS LIKELY, UNTIL LEGAL CASES PROVIDE MORE CLARITY. 15

17 RPI INFLATION The graph to the right shows the distribution of RPI inflation rates adopted by companies at 31 December The median RPI inflation is 3.10% which is 0.30% lower than last year s median. The range of RPI assumptions continues to be tightly packed around the median. AROUND 75% OF COMPANIES ARE USING AN ASSUMPTION WITHIN 0.10% OF THE MEDIAN. CPI INFLATION Percentage of Companies 55% 50% 45% 40% 35% 30% 25% 20% 10% 5% 0% 5% 12% 8% Percentage of Companies 35% 30% 25% 20% 10% 5% 0% 53% 7% 24% 33% 19% 11% 5% 1% 2.9% 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% RPI inflation rate (nearest 0.1%) 7% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% RPI less CPI (nearest 0.1%) THE PROPORTION OF COMPANIES ADOPTING AN ASSUMPTION GREATER THAN 1.00% HAS INCREASED FROM 7% LAST YEAR TO 22% THIS YEAR. 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION 2015 AND BEYOND CPI inflation is typically used for deferred revaluation and some pension increases. As there are no market indicators for CPI inflation, it is typically set using an offset to the RPI inflation assumption. The graph above shows the spread of the RPI-CPI wedge used by companies as at 31 December There is a clear trend with the majority of companies adopting the median of 1.00%, which is unchanged from last year. We have started to see companies moving towards higher assumptions for the RPI-CPI wedge this year. The proportion of companies adopting an assumption greater than 1.0% has increased from 7% last year to 22% this year. It will be interesting to see if this trend continues at the 2015 year end. At the time companies were setting their 2014 year end assumptions, the latest estimate from the Office for Budget Responsibility ( OBR ) was a long run wedge between RPI and CPI of 1.4%. The recently published fiscal outlook paper for 2015 shows a revised long run estimate of 1.0% based on the latest evidence. This may put the brakes on the trend towards a higher RPI- CPI wedge as companies set their assumptions in / MORTALITY 16

18 05 INFLATION RISK PREMIUM An inflation risk premium (IRP) is often applied to reflect certain supply and demand effects on the gilts market. These are argued to keep break-even inflation rates artificially high. However, the continued fall in implied long-term inflation expectations over the past few years means that there may be less justification for using an IRP adjustment compared to previous years. At December 2014, around 75% of companies used an IRP adjustment which is in line with last year. Percentage of companies 50% 45% 40% 35% 30% 25% 20% 10% 5% 0% 44% 23% 14% 4% 0.10% % 0.25% 0.30% Inflation Risk Premium (nearest 0.05%) THE AVERAGE IRP ADJUSTMENT REMAINS UNCHANGED SINCE 2012 AT 0.20% BELOW RPI INFLATION. 17

19 PENSION INCREASES Percentage of Companies 60% 50% 40% 30% 20% 10% 0% 1% SALARY INCREASES 27% 53% 4% -0.10% 0.0% 0.1% 0.2% 0.3% Salary increases are generally linked to economic growth and inflation levels. The median salary increase remains at 0.50% above RPI inflation at 31 December However, as more companies close their pension schemes to future accrual and active member populations reduce in general, this assumption becomes less important. Around half of the companies in our sample are closed to future accrual and a further are already closed to new entrants. This trend is only expected to continue as companies try to reduce uncertainty on their future pension liabilities. RPI less LPI assumption Percentage of companies 40% 35% 30% 25% 20% 10% THE MEDIAN ADJUSTMENT USED BY COMPANIES IS 0.10% WHICH REMAINS UNCHANGED SINCE % 0% 28% 34% 27% The most common pension increase is inflation capped at 5% each year which is known as Limited Price Inflation (LPI). This assumption is usually set with reference to the RPI inflation assumption by applying an adjustment based on the expected future volatility of inflation. As inflation rates have fallen, inflation expectations are further away from the 5% cap compared to last year resulting in lower offsets being applied for this assumption. Over half the companies in the survey are using the median assumption showing a smaller range in the pension increase assumption than in previous years. 7% 3% 1% 0% 0.1% - 0.5% 0.6% - 1.0% 1.1% - 1.5% 1.6% - 2.0% 2.10% Real salary growth rate 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION 2015 AND BEYOND 06 / MORTALITY 18

20 06 mortality As further research is carried out into life expectancies, this assumption remains key for pension schemes. Median assumed life expectancies for current pensioners and future pensioners have remained stable compared to last year. This section shows how the mortality assumptions used by companies have become bunched slightly compared to previous years. LIFE EXPECTANCIES The graphs below 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 a further 22.6 years on average whereas a future pensioner currently aged 45 would be expected to live for a further 24.2 years from the age of 65. DISTRIBUTION OF CURRENT PENSIONER LIFE EXPECTANCIES Life expectancy (from age 65) DISTRIBUTION OF FUTURE PENSIONER LIFE EXPECTANCIES Life expectancy (from age 65) Maximum Upper Quartile Median Lower Quartile Minimum 19

21 CURRENT PENSIONER LIFE EXPECTANCY (male currently aged 65) 41% Percentage of Companies Percentage of Companies 45% 40% 35% 30% 25% 20% 10% 5% 0% 30% 25% 20% 10% 5% 0% 2% 7% 29% 17% Expected future lifetime (nearest year) FUTURE PENSIONER LIFE EXPECTANCY (male currently aged 45 retiring at age 65) 35% 32% 4% 19% 27% 11% 75% OF COMPANIES ARE USING LIFE EXPECTANCIES WITHIN A 3 YEAR RANGE. 4% 7% Expected future lifetime (nearest year) The range of life expectancies in our sample has decreased since last year for both pensioners and future pensioners as companies are increasingly using similar data to derive these assumptions. In previous years, financial services companies have used assumptions that produce life expectancies around 1.0 year longer than companies in other sectors. However, this year, we have seen the difference drop to around 0.7 years which further illustrates the smaller range of assumptions adopted. 01 / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION 06 / MORTALITY 2015 AND BEYOND 20

22 06 BASE TABLES There is a clear trend in companies adopting the SAPS tables (95%) at 31 December These mortality tables are based on actual pension scheme experience rather the life insurance tables such as PA92 and PA00. PCA00, 1% (3%) PNA00, 2% (1%) Scheme Specific, 2% (2%) SAPS S2, 20% (n/a) FUTURE IMPROVEMENTS The gap between current pensioner and future pensioner life expectancies remains broadly stable from last year. The median gap is 1.8 years at 31 December 2014 for a 20 year projection. Allowance for future improvementt (nearest 0.1 years) >2.5 years years years years years 0.5 years 2% 2% 8% 21% 28% 39% SAPS S1, 75% (93%) In February 2014, the CMI (Continuous Mortality Investigation) committee published the S2 series of mortality tables which update the previous S1 tables to reflect the latest available data on pension scheme member s mortality experience. The impact of moving to the updated S2 tables is not expected to have a significant impact for most pension schemes. 0% 10% 20% 30% 40% 50% Percentage of companies Previous cohort projections continue to be phased out with around 95% of companies are now adopting projections published by the Continuous Mortality Investigation Bureau (CMIB) for future improvements compared to 91% last year. The CMIB is continually updating its research and produces annual updates of the CMI projection model. Companies are tending to use the most recent projections available. Just under 20% are using the CMI 2014 model year for their 31 December 2014 accounting results despite these tables only being published a month earlier in November Overall, moving from the 2013 model to the 2014 model may have resulted in a small reduction in liabilities, with a slightly greater impact for schemes with a younger membership. Around 40% of schemes used the median long-term future improvement rate of 1.25% with the range of 0.50% to 2.00% remaining broadly similar to last year. 20% OF SCHEMES ARE NOW USING THE S2 TABLES 21

23 CMI PROJECTION YEAR (2013 values in brackets) CMI LONG TERM RATE (2013 values in brackets) CMI less than 1%, 2% (3%) CMI 1.2%, 1% (0%) CMI 1.5%, 21% (20%) CMI 2009, 2% (8%) CMI 2014, 18% (n/a) CMI 2013, 50% (36%) CMI 1.25%, 41% (39%) CMI 2010, 2% (16%) CMI 2011, 19% (30%) CMI 1.75% or above, 7% (2%) CMI 2012, 9% (10%) CMI 1%, 28% (36%) JUST UNDER 20% ARE USING THE CMI 2014 MODEL FOR THEIR 31 DECEMBER 2014 ACCOUNTING RESULTS, DESPITE THESE TABLES ONLY BEING PUBLISHED A MONTH EARLIER IN NOVEMBER / A LOOK BACK TO / A LOOK AHEAD TO 03 / KEY HEADLINES 04 / DISCOUNT RATE 05 / INFLATION 06 / MORTALITY 2015 AND BEYOND 22

24 KPMG REGIONAL CONTACTS LONDON Naz Peralta P: E: MIDLANDS David Fripp P: E: NORTH David Bunkle P: E: SCOTLAND Donald Fleming P: E: SOUTH Andrew Coles P: E: Editor: Katy Edwards Author: Nazish Choudhury Data analysis: Marlani Pather and Siduth Wijeweera LAST YEAR S SURVEY VISIT FUSION PERSPECTIVES ON PENSIONS Click here to view the 2014 survey Click here to visit the KPMG Fusion site We also wanted to let you know about our thought leadership pieces, Perspectives on Pensions. You ll find nothing but honest opinions on our industry, including some that may surprise you. Click here to visit the KPMG Perspectives on Pensions site 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 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Oliver for KPMG OM035812A May 2015 kpmg.com/uk/pensions