Discount rate is the “most significant” financial estimate when assessing FTSE 350 defined benefit pension scheme obligations, research by Hymans Robertson has found.

In its report, Health of FTSE 350 DB Pension Schemes, published today, 2 July 2017, Hymans Robertson found that firms are taking alternative approaches to setting their discount rates due to “continued low yields”.

Furthermore, the research also found that a fall in life expectancy and the increase in transfers our of DB pension schemes are two more factors having a significant effect on FTSE 350 liabilities.

Hymans Robertson head of corporate consulting, Alistair Russell-Smith, said: “Discount rates are the most significant financial assumption for assessing pension obligations and are lower than reported last year.”

According the report, discount rates varied from 2.3 per cent to 2.8 per cent, averaging at 2.5 per cent.

“I expect the larger spread this year reflects more companies taking alternative approaches to setting the discount rate, with different extrapolation methods often adding 0.1 per cent to 0.2 per cent to the discount rate. This is likely to become more common if yields remain low,” he added.

Longevity has also had a significant impact on calculating liabilities, as life expectancy decreased by 0.2 years for pensioners and 0.5 for non-pensions on average, resulting in 1 per cent to 2 per cent decrease in liabilities.

However, the group warns that the most recent projection models could underestimate the future improvements in life expectancy.

Russell-Smith said: “A note of caution is that the standard tables are based on population data, whereas our Club Vita analysis shows different patterns of longevity improvements amongst different socio-economic groups. Using the standard tables unadjusted does therefore risk understating life expectancy.”

In addition, the report highlights the need for firms to take into consideration future transfers out of DB schemes, with about £50bn being paid out since 2015, according to Hymans Robertson.

“Firms are beginning to see the need to make an allowance for pension freedoms, with one firm already making assumptions for members taking transfer values out of the scheme in the future, increasing liabilities by about 2 per cent.

“This is a trend we expect to increase and is likely to have the impact of increasing liabilities,” Russell-Smith concluded.

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