The accounting discount rate used for pension obligations grew by 0.1 percentage point to 4.5%, Barnett Waddingham revealed today, citing a small rise in corporate bond yields over the year.
The pension consultants' annual survey, which focuses on the assumption adopted by FTSE 100 companies for determining the value of their pension liabilities for accounting purposes, found that the last increase in the IAS19 discount rate occurred in 2008 when there was a 0.4 percentage point rise from the 2007 rate (5.8% to 6.2%).
The firm said 46 out of the 51 companies that disclosed a discount rate assumption used a rate of between 4.4% per year and 4.6% per year in their pension liability calculations.
Barnett Waddingham associate Martin Hooper said: 'We have seen a small increase in corporate bond yields over the year and this has been reflected in an average increase in discount rate used for accounting purposes.
'This coupled with strong returns from equity investments has seen an improvement funding levels of pension schemes run by the UK's largest companies. In the recent past, we have seen a decline in discount rates, contributing to increasing pension deficits. The reversal of this trend is certainly a welcome change.'
Despite the small increase, Barnett Waddingham warned that companies should still carefully consider their approach in setting their discount rate, as those using an index yield approach may be overstating their accounting liabilities.
'Taking specific account of the duration of a scheme's liabilities may lead to an alternative, more appropriate assumption being used, which may result in lower accounting liabilities. Setting the right duration is key,' the firm stated.
Findings from the survey showed that the average IAS19 funding level was approximately 91% in 2013, an improvement on 2012 when it was 88%.
It also noted that the average real salary growth assumption dropped to 0.3% in 2013 (0.5% in 2012). Some companies in the survey have pensionable salary growth assumptions below inflation, reflecting decisions to cap increases in pensionable salary at a level below the rate of inflation, Barnett Waddingham said.
Approximately 35% of companies in the survey were more than 95% funded in 2013. This compares to around 30% in 2012, just over 35% in 2011 and around 25% in 2010.
The firm also found that the average Retail Prices Index inflation assumption adopted by companies in the survey was 3.4% per year (3% in 2012), meaning that investors are willing to pay more for index linked gilts because of the inflation protection they receive, said the firm. Assumed future inflation was increased by more than the small increase in discount rates, which other things being equal would have increased the IAS19 deficit for most schemes, it added.
