FRS102
30 June 2024
By Daniel Martin
June 2024
Liabilities on 30 June 2023 were lower than a year earlier. Higher bond yields resulted in higher discount rates, lowering liabilities. This fall in liabilities was often the most significant factor when comparing 30 June 2023 balance sheets to a year earlier. While asset returns varied significantly by class, a similar or improved balance sheet was most likely, with investment strategies that more closely matched movements in the liabilities faring less well.
But how does 30 June 2024 compare?
The key drivers of your balance sheet are ultimately out of your control. Bond yields, inflation expectations, longevity trends and asset performance.
Discount rate (the higher the discount rate the lower the liabilities)
FRS102 requires that the discount rate be based on the market yields on high quality corporate bonds. So how has the bond yield moved?
Bond yields haven’t fluctuated as significantly since 30 June 2023 as they did in the previous year. As such, the impact on liabilities will also be less significant. On 31 May 2024 bond yields were marginally higher than on 30 June 2023. The impact of this on your liabilities will vary depending on their duration, but for a scheme with a 20-year duration you could expect a decrease in liabilities of around 1%.
Inflation (the higher the inflation the higher the liabilities)
The difference in yields between fixed interest bonds and index-linked bonds may be used to give an indication of the expected future rate of inflation and this is likely to be how your inflation assumptions are derived. The Bank of England produces statistics for future inflation derived in this way.
Similarly to bond yields, inflation expectations have remained reasonably stable since 30 June 2023, particularly when compared to the previous year. Inflation expectations are marginally higher on 31 May 2024 than on 30 June 2023. The impact of changes to inflation expectations on your liabilities will vary depending on their duration but also the proportion of them that are inflation linked. For a scheme with a 20-year duration with half of its liabilities linked to inflation you could expect an increase in liabilities of less than 1%.
Longevity (life expectancies increase, liabilities are higher)
The Continuous Mortality Investigation (CMI) produce improvement tables each year. It is common to update mortality assumptions to reflect the latest version either each year or in line with the valuation cycle (every 3 years).
Please note that due to uncertainty regarding the long-term impact of Covid-19 on life expectancies, the default versions of the CMI_2020 and CMI_2021 models ignored mortality experience during 2020 and 2021. CMI_2022 was the first iteration of the CMI Model that allowed for mortality experience after the coronavirus pandemic began. Lower initial mortality improvements in CMI_2023 compared to CMI_2022, at most ages, also lead to cohort life expectancies that are lower for CMI_2023 than for CMI_2022 at most ages.
The CMI_2024 model is expected to be released in March next year.
Please note that the analysis above is based on the standard S3 mortality tables. The S4 series tables were released earlier this year. If the analysis was repeated using the standard S4 tables, the equivalent figures at 65 for the CMI_2023 projections would be 21.11 for males and 23.58 for females.
Assets
The performance of your assets will vary depending on the mix of asset classes you hold along with the performance of the specific underlying assets. However, as an indication, here is a look at the performance of some of the key asset classes since 30 June 2023.
In summary
The liabilities are likely to be broadly similar or slightly lower if mortality assumptions are updated, with only small changes in bond yields and inflation expectations. Investment experience is likely to be the most significant cause of change in the balance sheet with equity investments performing particularly strongly.
This is clearly a very high-level look at the factors that drive your balance sheet, in reality the specifics of your scheme, such as asset portfolio, liability duration, age profile and benefit structure, will all change the relative impact of each of the items discussed. Scheme experience, like contributions paid during the year, will also be reflected in the final figures.
Please also note that there is still a month until the year-end and a lot can happen in that time.
