Consulting Actuaries

A good year for DB pension schemes?

Royal London Consulting Actuaries

10 December 2014

UK equity markets have failed to impress over 2014, as global economic growth stalls and oil prices fall. On the other hand, corporate bond yields have fallen significantly. What does this mean for employers with defined benefit (DB) pension schemes?

This is not good news. Any deficit to be recognised in company accounts is likely to have increased significantly over 2014.

Corporate bond yields have fallen significantly, with inflation down marginally

The chart below shows the yield on an AA corporate bond index over 2014, together with the 15 year spot rate for price inflation. 

Yield on an AA Corporate Bond index over 2014, together with the 15 year spot rate for price inflation

Falling corporate bond yields with a smaller reduction in future inflation expectations is generally bad news for the finances of DB pension schemes. Falling yields on corporate bonds result in a rise in the value of liabilities.

Will these conditions continue to prevail at the end of the year?         Probably.

UK Equities have failed to impress over 2014

The total returns (1) on the main asset classes over 2014 to date are shown below.

Total return over 2014 to 1 December

UK Equities 

+   1.8%

Overseas Equities 

+   6.2%

Fixed Interest Gilts

+ 15.4%

Index-Linked Gilts 

+ 17.5%

Corporate Bonds

+ 16.8%


+ 12.1%

Equities, particularly UK equities, have failed to impress over 2014. Conversely property, gilts and corporate bonds have shown double digit returns. Overall investment performance for a particular DB scheme will crucially depend on its exposure to the different asset classes.

Have DB pension costs in company accounts improved over 2014?

Probably not.

The cost of a DB pension scheme booked in the company accounts is heavily dependent on the yield available on long dated AA corporate bonds. This yield has fallen significantly over 2014, by about 0.9% p.a. On the plus side, expectations of long term price inflation have eased slightly. The impact of these two factors is likely to add about 10-15% to the value of the liabilities.

For schemes (2) with a significant proportion of the assets held in UK and overseas equities, the overall investment return on the assets is likely to be about 5-10%. Therefore, liabilities are likely to have grown by 5-10% more than the assets. Any deficit to be recognised in the company accounts is likely to have increased significantly over 2014.

For schemes (3) with investments primarily held in bonds, gilts and property then the overall investment return may be 10-15%. This may largely offset the increase in the liabilities. In this case, any deficit may be broadly unchanged.


If you would like to discuss this matter further please contact us.


(1) Performance measured by reference to the FTSE All Share Index, the FTSE Global All Cap ex UK Index, the FTSE Over 15 Year Index, the FTSE Over 5 Year Index and the Royal London property fund. 

In deriving the above illustrative figures, we have assumed that the duration of the DB pension scheme’s liabilities is 20 years and 50% of both pension increases in deferment and in payment are linked to price inflation. No allowance is made for any contributions paid by companies to address a funding deficit.

(2) The assets are assumed to be invested broadly 60% equities (equally split between UK and overseas) 40% bonds (equally split between fixed interest gilts, index linked gilts and corporate bonds).

(3) The asset split is assumed to be 15% equities 85% bonds.