The current edition of our Liability Monitoring deals with the position at end quarter 1, 2016. To view our full update, please click the pdf link. The highlights for this issue of Liability Monitoring are:

  • Yields on Euro Sovereign and Corporate bonds have decreased sharply.
  • We estimate that accounting liabilities have increased by around 8% since 31 December 2015 (for a sample scheme with 20 year duration) as a result of movements in discount rates. 
  • Annuity prices have increased significantly and are back to the levels reached in early 2015.
  • The Settlement Premium is broadly unchanged and remains outside the range where we see settlement of liabilities as an attractive option.
  • The Transfer Value basis (used to value active and deferred member liabilities under the Funding Standard) has remained unchanged, although there is an expectation that the basis will be strengthened.

Liability management exercises

The sharp fall in bond yields combined with the poor equity returns in Q1 means that funding levels for most pension plans deteriorated over the quarter.  This places further pressure on sponsoring employers and we are seeing an increase in the number of companies examining ways to reduce their exposure to pension liabilities.  In particular, a number of Enhanced Transfer Value (ETV) exercises have been completed by Irish PLCs.  These exercises allow companies to remove liabilities from their balance sheet at a cost which is lower than the accounting value of those liabilities.  This is one example of the range of solutions which are available to proactively manage pension liabilities.

If you would like to discuss these issues in more detail please contact your Willis Towers Watson Consultant or a member of our Corporate Consulting Team.