Deficits of UK pension schemes have decreased by around £2bn (€2.4bn) over the month to 28 July 2022 against long-term funding targets, an analysis from XPS Pensions Group’s funding tracker XPS DB:UK has revealed.

Based on assets of £1.7trn and liabilities of £1.7trn, the aggregate funding level of UK pension schemes on a long-term target basis was 97% as of 28 July 2022. XPS estimated that at the end of July 2022 the average pension scheme would need an additional £5,000 per member to ensure it could pay their pensions into the long-term.

XPS said that inflation continues to have a large impact on pension scheme liabilities, with current levels driving up benefits.

A slight fall in long-term inflation expectations contributed towards a marginal improvement in funding levels over July despite a slight fall in Gilt yields. This added to the improvements in long-term positions seen over 2022 – cumulative improvements that are now in excess of £270bn.

Towards the end of the month US Federal Reserve chair Jerome Powell stated that any decisions around increasing interest rates in its September meeting “will depend on the data we get between now and then”.

This, XPS claimed, is a slight softening in the Fed’s position as the market has been expecting the sustained rate rises that have been consistently seen in recent announcements.

US markets reacted positively to indications that the Fed will keep an open mind in September, providing a small boost to growth assets at the end of the month.

Felix Currell, senior investment consultant at XPS, said: “Whilst July has seen pension scheme liabilities stay fairly flat compared to recent months, hedging strategies continue to be under stress.”

He noted that many pension schemes that use leveraged liability-driven investment products have been required to post significant collateral, bringing forward the need for trustees to consider the liquidity position of their schemes.

“The threat of global recession still looms over growth markets. However, it was interesting to see the positive response in US equities in particular following the Fed’s announcements,” he said.

The latest digital edition of IPE’s magazine is now available