The financial health of the UK’s defined benefit schemes failed to improve over the last quarter according to Legal & General Investment Management’s defined benefit (DB) health tracker.
It points out that this is the first quarter since March 2020, following the collapse in shares prices at the start of the Covid pandemic, that growth has not been recorded. However, LGIM points out that despite the stalled growth this quarter, funding levels for DB scheme remain stronger than they were pre-Covid.
LGIM’s health tracker says that the average DB scheme can expect to pay 98.2 per cnet of accrued benefits as of 30 June 2021. This is the same figures recorded at the end of March this year.
The health of the UK’s DB pension schemes had originally dropped as low as 91.4 per cent as of 31 March 2020, having previously been at 96.5 per cent on 31 December 2019.
LGIM says these figures suggests that DB schemes may well have completed their initial recovery from the pandemic. However, it adds that it is important to note that these figures may understate the negative impact of the pandemic, particularly the weakening of covenants that many schemes will have endured.
John Southall, head of solutions research at LGIM says: “Over the second quarter, growth assets continued to outperform but interest rate levels fall back somewhat. This partly reversed the very sharp rise seen in Q1 – the largest quarterly increase in nominal rates seen in years.
“Sponsor health remains a key concern as we move forward. As for the previous quarter, we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects covenant strength, impacting the security of benefits and our Expected Performance of Benefits Met (EPBM) measure.
“The long-term impact of the pandemic remains unclear, however, we noted that if a rating of B was assumed, the EPBM figure on 30 June 2021 would be around 1.2 per cent lower.”