Changes to defined benefit pension scheme assumptions over 2022 have resulted in a trend towards schemes showing significantly reduced liabilities and in many cases showing a net surplus instead of a liability.

These trends are driven by changing assumptions about the discount rate, which is used to calculate the present value of future payments (i.e. the value of these payments in today’s money). Higher interest rates over 2022 have resulted in a higher discount rate, which has reduced the present value of future payments under schemes. Falling life expectancies over 2022 have also played a part in reducing the value of liabilities.

The accounting treatment of schemes in surplus vary depending on the specific terms and conditions of the scheme. A defined benefit pension asset can only be recognised in the accounts if you can access the asset, i.e. if the scheme terms permit a refund or offset against future payments. If the surplus cannot be accessed then no asset should be recognised.

Significantly reduced pension scheme liabilities will result in stronger balance sheets by increasing the overall level of net reserves held at year-end. Charities holding designated funds relating to pension schemes may need to consider reviewing these funds and/or revising reserves policies in light of these changes as the risks around defined benefit pension schemes change.