Equities performed well over the second quarter of 2021 amid the roll-out of COVID-19 vaccinations and an improving global economic outlook. The FTSE All-Share Total Return Index reached a three-month peak around the middle of June before falling back slightly, partly due to concerns around the impacts of the delta variant of COVID-19 on re-opening plans. The Index increased c.6% over the quarter and is c.11% up since the start of 2021.
Both AA-rated corporate bond yields and gilt yields remained fairly stable during the quarter. Such yields fell during April, peaked in May and then fell again to finish the quarter 0.17% pa lower for corporate bond yields and 0.14% pa lower for gilt yields. Consequently, there was a marginal narrowing of credit spreads over the quarter.
Despite bond yields falling during the second quarter, they remain up around 0.5% pa for the year to date.
Long-term inflation expectations decreased by around 0.1% pa over the quarter but are still around 0.2% pa higher for the year to date.
Following the RPI reform announcement last November, the trustees of three pension funds – the BT Pension Scheme, the Ford Pension Schemes and the Marks and Spencer Pension Scheme – took the decision in April to seek a judicial review of the decision made by HM Treasury and the UK Statistics Authority to effectively replace RPI with CPIH from 2030. The trustees have stated that this action has been taken due to the impact of RPI reform on members’ benefits and the value of the pension scheme assets.
It remains to be seen whether this will have any impact on the planned change to RPI.
This document sets out the market practice on pensions accounting assumptions at 30 June 2021 that PwC has observed, key market indicators and current pensions accounting developments.
30 June 2021
30 June 2020
|Optimistic||Median||Prudent||Optimistic||Median||Prudent||(0.1% pa/1yr )|
|Discount rate||2.0% pa||1.9% pa||1.7% pa||1.7% pa
||1.5% pa||1.4% pa||c.£10m|
|RPI inflation||2.9% pa||3.2% pa||3.5% pa||2.7% pa
||2.9% pa||3.1% pa||c.£8m*|
|CPI inflation||2.3% pa||2.7% pa||3.0% pa||1.7% pa
||2.0% pa||2.5% pa||c.£4m|
|Life expectancy - male @ 65||20 years||22 years||23 years||21 years
||22 years||24 years||c.£15m|
|*RPI inflation assumption sensitivity allows for an equivalent movement in the CPI inflation assumption.
** The range of CPI inflation assumptions quoted at 30 June 2021 reflects an average of pre- and post-2030 rates for a typical scheme.
*** Suitable life expectancies are specific to each scheme’s population, and should generally be set based on scheme-specific factors and analysis.
|Key market indicators||30 June 2021||31 March 2021||Change
||30 June 2020
|FTSE All-Share Total Return Index||7,852.35||7,435.59||UP
|UK fixed interest gilt index||6,006.27||5,819.62||UP
|iBoxx AA corporate bond index yield||1.86% pa||2.03% pa
|RPI inflation (20-year spot rate)||3.58% pa||3.68% pa||DOWN