Consulting Actuaries

DB funding continues to improve?

Royal London Consulting Actuaries

31 March 2014

Equities and property have performed well since April 2013 and both corporate bond and gilt yields have risen. Does this mean the finances of defined benefit (DB) pension schemes are improving?

Most likely, it depends on when you last assessed the position!

  • For DB pension schemes with a significant holding in equities and/or property, the financial position should have improved since April 2013.  This is good news for Employers with March/April 2014 year ends.
  • For Trustees about to commence a March/April 2014 triennial funding valuation, the current funding levels are likely to be worse than they were 3 years ago, despite the more recent improvements.

Have corporate bond and gilt yields peaked?

The chart below shows the yield on an AA Corporate Bond index and a Gilt index since April 2011.

Corporate bond and gilt yields since April 2011

Sources: Barclays Capital, FTSE International and Bank of England

Since April 2013

The yields on AA Corporate Bonds and Gilts have increased since April 2013. In isolation this is generally good news for the finances of DB pension schemes. Rising Corporate Bond and Gilt yields typically result in a fall in the value of DB pension scheme liabilities.

However, have corporate bond and gilt yields peaked? Have they attained their “new normal” level? Many uncertainties continue to exist, particularly around Quantitative Easing and the influence the Bank of England, now a significant holder of Gilts, may exert on the Gilts market.

Over the last 3 years

Although yields on AA Corporate Bonds and Gilts have risen since April 2012, they are still lower than they were in April 2011. For Trustees and Employers who are about to commence a triennial funding valuation, this is not good news.

Equities and property have performed well since April 2013

The total returns on the major asset classes since April 2013 (and April 2011) to date are shown below.

Total return over the year to 31 March 2014

Total return over 3 years to 31 March 2014

UK Equities

+ 11.7%

+ 26.8%

Overseas Equities

+ 19.1%

+ 28.7%

Fixed Interest Gilts

- 4.0%

+ 17.8%

Index-Linked Gilts

- 6.2%

+ 25.2%

Corporate Bonds

- 1.9%

+ 31.4%


+ 11.4%

+ 21.3%

Since April 2013

Equities and property have performed well since April 2013. Overall investment performance for a particular DB scheme will crucially depend on their asset allocation.

Over the last 3 years

Investment performance over the last 3 years has generally been good. However, the good performance of Gilts, Index-Linked Gilts and Corporate Bonds has a down-side. Lower Gilt and Corporate Bond yields typically result in a higher value being placed on DB scheme liabilities, potentially offsetting asset performance.

Have DB pension costs in company accounts fallen since April 2013?

Most likely.

The cost of a DB pension scheme booked in company accounts is dependent on the yield available on long dated AA Corporate Bonds. The yield on AA Corporate Bonds is now higher than it was at April 2013 (by about 0.3% p.a.). In isolation this is good news for UK companies.

Overall, for any DB pension scheme with a significant proportion of asset held in equities and property, any deficit to be recognised in March/April 2014 company accounts is likely to have fallen since April 2013, with assets growing by possibly 5-10% more than the value of the scheme’s liabilities.

Is DB scheme funding worse than in April 2011?


For DB pension schemes with an April 2014 triennial funding valuation, the funding position is likely to be worse than it was in April 2011 (potentially by 5-10%); with the impact on the liabilities of falling Gilt yields probably only being partially offset by investment performance.

Can DB schemes in the process of doing a funding valuation allow for recent experience?

Yes. Trustees and Employers with funding valuations in progress may wish to consider what allowance, if any, to make for post valuation date events in their funding negotiations. They should also consider making use of the flexibilities available in setting contribution rates.


If you would like to obtain more detailed funding information on your DB pension scheme, or if you have any questions, please contact us.


In deriving the above illustrative figures, we have assumed that the duration of the DB pension scheme’s liabilities is 20 years and 75% of both pension increases in deferment and in payment are linked to price inflation. 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).

For the assets, we have measured UK equity performance by reference to the FTSE All Share Index, overseas equity performance by reference to the FTSE Global All Cap ex UK Index, Gilt performance by reference to the FTSE Over 15 Year Index, index-linked Gilt performance by reference to the FTSE Over 5 Year Index and property performance by reference to Scottish Life’s property fund.

No allowance is made for any contributions paid by companies to address a funding deficit.

The impact of the change in financial conditions over the 1 or 3 years to April 2014 for a specific scheme will depend on the scheme’s membership profile, benefit structure and investment strategy. The impact for a specific scheme may be higher or lower than the effect described in this article.

Circumstances may have changed since this article was written. It should not be taken as actuarial or legal advice.