Companies are bracing themselves for some bad pension news after the revelation that the yield on corporate bonds has fallen this year.
Accountants have warned firms that they face ‘significant increases’ in their pension liabilities for 2012, along with a substantial knock-on effect for 2013 benefits expenses.
This increase will happen despite no changes being made to the pension plans themselves.
Financial services firm Towers Watson says that bonds have fallen in a similar pattern to 2010 which also led to huge pension liabilities.
Unfortunately, the most significant bond yields decreases are in the Eurozone. Over the past year the discount rates have tumbled far more than those for the UK and US bonds.
The issue at the heart of the worry is that financial markets are in turmoil and pension plans, which are governed by global accounting rules, are controlled by discount rates.
Pension savers need to pay more
So when the bond yields fall, so does the discount rate which drives up the present value of pension benefits.
Conversely, when bond yields increase, so do discount rates, which drive down pension values.
The move means that employers should begin planning now for potential pension deficits on their 2013 balance sheets.
Towers Watson also say employers should plan for higher expenses under plans versus the amount currently reflected in budgets and what the impact on loan covenants with banks will be.
Also highlighted is a need to work out the local funding requirements and potentially asking staff to pay higher minimum contributions.
This increase in contributions will be necessary to make up for any shortfall.
The firm cautions that it would be dangerous to generalise on what the impact of the bond yield drop will be on businesses as individual employers’ circumstances vary considerably.
They say the drop could be ‘relatively insignificant’ for some but ‘very significant’ for others.
Financial turbulence
It might not be all bad news for companies however.
Towers Watson points out that investment returns were favourable earlier this year and this may offset the mediocre performance recently.
All companies with a staff pension scheme are being urged to discuss what the likely impact is going to be for them with their accountants because there will probably be an impact on liabilities and pensions and for other employee benefit plans.
And, as Towers Watson say, not doing anything now means that most senior managements in the country are going to be ‘in for some surprises’ at their year-ends.
It also safe to assume too that continued turbulence in the financial markets will lead to further issues for those accounting for pensions plans in the future.
