That is very helpful info on the pension deficit, thanks. I have recently been involved in the valuation of an unfunded pension liability and the actuaries insisted on using three scenarios for discount rates, the difference in the size of the deficit at the lowest rate was ten times that at the highest of the three rates! The pension in question was not in the UK so the rates are not comparable. But it does raise a question in my mind as to who determines these discount rates, the actuaries, professional body, pensions regulator? That decision could make a significant difference to the view on a number of HYP candidates, not just CLLN."
Some questions on pension deficits came out of the Carilion thread above, but I thought perhaps it warrants its own topic?
Two recent sets of results announcements were Centrica and Carillion. Regarding their pension fund liabilities:
1. Centrica decreased its discount rate from 3.9 to 2.7%, increasing the pension liability from £100m to £1.1bn (rounded)
2. Carillion decreased its discount rate 3.95 to 2.7%, doubling the pension fund liability in the process
One notable difference is Carillion is making cash contributions into this pension fund liability, and it doesn't appear that Centrica is.
From what I could find, deciding when a company needs to make cash contributions is quite opaque:
"Notes on deficit measures: Funding: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor."
My profile doesn't have permission to post links to the internet yet. The above was sourced from an article by a PWC partner in Feb 2017
Whilst changes in the discount rate is relatively important, the decision whether cash contributions are required is more so IMHO as this might impact on dividend policy
Terry, appreciate this doesn't answer your question on who decides what discount rates are applied. Correlation between 1 and 2 above might suggest industry practice?
Look forward to some comments and contributions to this relevant topic please