The health of the UK’s Defined Benefit (DB) pension schemes continued to improve in the fourth quarter of 2021, with the average scheme expected to be able to fund 98.4 per cent of accrued pension benefits as of 31 December 2021, according to Legal & General Investment Management’s (LGIM).
According to LGIM’s DB Health Tracker, a monitor of the current health of UK DB pension schemes, this is a 0.1 percentage point increase from the previous three-month figure of 98.3 per cent on 30 September 2021.
The health of the UK’s DB pension schemes has been improving over the past two years and declined to as low as 91.4 per cent. But LGIM says the next 12 months will be critical for both pension funds and other investor groups as tighter monetary policy is expected following the recent interest rate hike.
LGIM head of solutions research John Southall says: “The final quarter of 2021 saw a continued strong performance from growth assets which helped our measure of UK scheme health edge to its strongest recorded position yet. Scheme health also benefitted from a modest drop in inflation expectations, falling back from the elevated levels we saw in the third quarter (the highest levels since 2008). However, this was offset by a slight decrease in long-term interest rates. Overall, our Expected Proportion of Benefits Met (EPBM) measure managed to post a small gain and reach a new high.”
“The fact that the measure means it is impossible for schemes to be more than 100 per cent healthy makes large increases in EPBM challenging. However, it is encouraging to see the security of members benefits continue to improve.
“As for previous quarters, we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects current covenant strength. However, the long-term impact of the pandemic on DB schemes’ health remains unclear. It is worth noting that if a B rating was assumed instead, the EPBM figure would be around 1.1 per cent lower.”
LGIM head of rates and inflation strategy Christopher Jeffery says: “The fourth quarter of 2021 had plenty of twists and turns, but the ultimate outcome in financial markets was more of the same: equity market buoyed by the ongoing economic recovery, short-dated interest rates rising, and inflation overshooting expectations. Despite those headwinds, long-dated gilt yields which matter the most for discounting pension fund liabilities were almost totally unfazed.”
“For sterling investors, the most important news came towards the end of the quarter with the first hike in interest rates by the Bank of England for four years. Followed by a further increase in rates today, the Old Lady of Threadneedle Street has signalled that the days of benign neglect about the inflation outlook being over, ‘forward guidance’ has been abandoned as a policy tool, and balance sheet reduction will soon be upon us. 2022 looks to be a pivotal year for investors as the market navigates the transition from easy to tightening policy conditions both at home and abroad.”
