The health of the Defined Benefit (DB) pension schemes in the UK has continued to improve in the second quarter of 2022, with the average scheme expected to be able to fund 98.8 per cent of accrued pension benefits as of June 30, 2022, according to Legal & General Investment Management (LGIM).
According to LGIM’s DB Health Tracker, this is a rise of 0.3 percentage points from the figure of 98.5 per cent recorded three months earlier on 31 March 2022.
The health of the UK’s DB pension schemes has been progressively improving since March 2020, when it had fallen as low as 91.4 per cent due to the pandemic’s immediate effect on financial markets.
According to LGIM, the high valuation suggests that many DB schemes are in a strong position as they approach endgame and choose the appropriate course of action to guarantee the benefits of their members.
LGIM head of solutions research John Southall says: “Despite the significant short-term inflationary headwinds, the second quarter of 2022 saw a substantial rise in both long-term nominal interest rates coupled with a fall in long-term expected inflation, leading to an increase in long-term real interest rates. The increase in both nominal and real interest rates benefitted a typical scheme due to underhedged liabilities.
“This was largely offset by the poor performance of growth assets relative to expectations. Overall, however, 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.”
LGIM head of rates and inflation strategy Christopher Jeffery says: “The big rise in inflation-adjusted (or real) interest rates comes in the aftermath of the Ukrainian invasion and the associated shock to natural gas prices.
“That has triggered a policy pivot from major central banks, including the Bank of England, to focus on fighting inflation as the primary policy priority. Risk assets have been volatile as markets digest that changing backdrop, with global credit and equities both suffering in the second quarter.
“Recessionary clouds are, unfortunately, gathering in both Europe and the UK. That would normally precipitate significant downward pressure on yields, but the inflationary backdrop currently trumps such concerns.”