In our 31 March 2025 and 30 June 2025 updates we summarised some of the areas companies will be considering in relation to their defined benefit pension schemes. As we approach 31 December 2025 many companies will be preparing for their year-end accounts and will use this as an opportunity to carry out a detailed review of the assumptions being adopted to value their pension obligations. As part of this process, companies will need to ensure that the assumptions adopted remain appropriate and consistent with the characteristics of their own schemes, as well as reflecting any developments which may have arisen over the year (e.g. scheme specific events, or wider market changes).
The discount rate assumption is used to place a value on the expected benefits payable over the lifetime of a pension scheme. There has been a notable increase in the discount rate assumptions being adopted over the year, driven by the rise in yields on AA-rated Sterling corporate bonds over that period (a similar trend has also occurred with yields on UK Government bonds, "gilts").
Inflation assumptions are used to estimate how members' benefits might increase in the future. There has been a decrease in inflation assumptions over the year, with this typically reflecting the change in investors' views of future inflation (as the assumption is typically set with reference to market data).
Assumptions around life expectancies estimate how long benefits will be paid to members and their dependants. In June 2025 the CMI 2024 mortality projections model was released, which generally results in slight improvements to life expectancies (relative to the CMI 2023 model). As many companies have a policy to adopt the latest model for accounting purposes, we have seen a slight increase in life expectancies over the year.
Taking the above into account, we would generally expect liability values to have reduced over the year. In terms of the net balance sheet position, however, the extent to which this will have changed will depend on the specific circumstances of schemes (in particular, the investment strategy adopted over the year).
