FRS102
31 March 2025
By Daniel Martin
March 2025
As a consequence of both bond yields and inflation expectations being broadly similar to a year earlier, the same was also true for liabilities on 31 March 2024 when considered year on year. Investment experience varied, with particularly strong returns for overseas equities, so changes in the balance sheet position depended greatly on the mix of asset classes held.
But how does 31 March 2025 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 have generally increased since 31 March 2024, particularly showing a general upward trend during the second half of that period. Overall, between 31 March 2024 and 28 February 2025, bond yields have increased by approximately 0.6% pa. 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 11%.
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.
Inflation expectations have remained reasonably stable since 31 March 2024, falling slightly, and on 28 February 2025 they were approximately 0.15% lower. 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 a decrease in liabilities of around 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 during quarter 2 of 2025.
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 21.14 for males and 23.63 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 31 March 2024.
In summary
The combined impact of changes in bond yields, inflation expectations and to life expectancies is likely to result in lower liabilities. Investment experience varies significantly by class, meaning the overall impact is less clear but an improvement is expected at this point. With equity investments performing strongly, schemes that have significant exposure to equities are likely to fair better.
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.
*to 24 February 2025