The accounting measures of the liabilities of defined benefit (DB) schemes in most developed economies have seen marked increases in liabilities due to declining corporate bond yields, according to research by Mercer.
The consultancy's research found equity values in most countries with developed financial markets have been volatile throughout 2010, although in many cases returns over the past 12 months have been positive.
However, companies with significant defined benefit schemes preparing their financial statements under current market conditions would still report larger pension scheme deficits than those 12 months ago because of falls in corporate bond yields, which affect the value placed on pension scheme liabilities.
Frank Oldham, Mercer's global head of pension risk consulting, said: “A 50 basis points fall in discount rates roughly results in a 10% increase in liabilities for a pension scheme. As a result, measures of pension scheme liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets.”
In both the US and the UK, nominal corporate bond yields declined in the second half of 2009 and have continued to fall throughout 2010. In the UK, benefits are inflation linked so liabilities have been more stable over the year, but they still sit at historically high levels.
Oldham said: “Our experience is regional differences will affect the liabilities recorded. For example, in the UK the liabilities are predominately inflation linked. Since the fall in corporate bond yields partly reflects market expectations that future inflation will be lower, the accounting measure of pension scheme liabilities has not changed as dramatically as it has in other countries that do not have index linking. However, despite such local differences, pension scheme deficits measured on an accounting basis are proving stubbornly hard to eradicate around the world.”
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