Liability Monitoring – December 2017

December 15, 2017
| Ireland

With many companies facing into a 31 December financial year end, we have released a December 2017 edition of our regular Liability Monitoring briefing.  This provides a brief overview of some key liability indicators.

Highlights as we approach year end:

  • Given the fall in the yields on Euro Corporate bonds this year, accounting discount rates are expected to be lower at year end compared to last year, based on conditions at 7 December 2017.  The attached Liability Monitoring briefing shows indicative discount rates at both 30 November and 7 December 2017.  This data is included to capture the impact of the recent downgrade of some high yielding corporate bonds that were included in Euro AA Corporate bond indices on 30 November but will be removed at year end.
  • We estimate that accounting liabilities will have increased by around 3% since 31 December 2016 (for a sample scheme with 20 year duration) as a result of movements in discount rates alone.  The impact on a scheme’s funding position will depend on its investment strategy.
  • Annuity prices are broadly unchanged over the year.
  • The Settlement Premium is unchanged and remains outside the range where we see settlement of liabilities as an obviously attractive option.

Opportunity to manage liabilities

As companies with material DB pension plans prepare to see pension liabilities increase significantly at year end, it is an appropriate time to consider the best approach for managing these liabilities. There are a range of solutions which can be adopted to offer greater flexibility to members and reduce pension costs.  In particular, a number of Irish PLCs have completed Enhanced Transfer Value (ETV) exercises.  These exercises allow companies to remove liabilities from their balance sheet at a cost which is lower than the accounting value of those liabilities. 

Year-end and 2018 budgeting

This is also an opportune time for companies to review the methodology used to set their pensions accounting assumptions, including expectations for future inflation, salary increases and mortality and also to make sure that adequate provisions have been included within 2018 corporate budgeting for pension expenses.

If you would like to discuss these issues in more detail please contact your Willis Towers Watson Consultant or a member of our Corporate Consulting Team.