We base the Pension Cost Accounting Index on the monthly PPF 7800 Index from the Pension Protection Fund. All of the UK’s 5,318 Defined Benefit schemes are required by law to submit information to the PPF every year. This makes it the best publicly available source of UK DB pension scheme asset and liability data.
We leave the asset data unchanged, but we modify the liability values. Firstly, we allow for full scheme benefits, rather than reduced PPF benefits. Secondly, the PPF 7800 Index values a pension scheme’s liabilities on the basis set by the PPF assuming the employer became insolvent and the scheme entered the PPF – this is equivalent to discounting all future pension payments based on gilt yields. Under FRS102 and IAS19 however, pension scheme liabilities must be valued with reference to the yields on high-quality corporate bonds.
Every month we construct a spot yield curve based on the bonds in the iBoxx AA-rated sterling corporate bond index, extrapolating the curve for later terms where there is little data. We then use the resulting curve to determine a discount rate to apply to the accounting valuation of an average pension scheme.