XPS Pensions’ DB:UK forecasts that the average DB scheme will reach long-term aims in less than four years under the proposed new funding code regulations.
According to XPS’s DB:UK funding tracker, UK pension scheme deficits declined by around £45bn in the month to 30 May 2022, compared to long-term financing targets. A further rise in gilt yields, as well as a drop in long-term inflation predictions, contributed to the 25 per cent cut.
As of 30 May 2022, the average funding level of UK pension systems on a long-term target basis was 91.8 per cent, based on assets of £1,689bn and liabilities of £1,841bn. According to XPS, by the end of May 2022, the typical pension scheme will need an extra £15,000 per member to ensure that their pensions are paid in the long run.
According to XPS, during the month of May, funding levels fluctuated a lot. Rising gilt yields and decreased long-term inflation expectations lowered liabilities. Despite persistent concerns about short-term inflation and growing living costs, long-term inflation expectations declined last month, helping to further reduce deficits.
XPS Pensions Group senior consultant Charlotte Jones says: “Despite improvement in schemes’ positions over May, it was a volatile month. Short term inflation reached a 40-year high, gilt yields fell and subsequently rose again by 0.30 per cent and schemes’ assets suffered similar volatility due to continued economic concerns across global markets.
“This uncertainty highlights the need for schemes to keep on top of their hedging arrangements, particularly considering the recent inflation hikes. However, despite such volatility some schemes will be in a good position and looking to reach their long-term targets within 4 years meaning that it is becoming increasingly important for schemes to prepare ahead of their conclusion.”