The health of the UK’s defined benefit (DB) pension schemes continued to edge upwards in the second quarter of 2022, reaching a new high as of 30 June 2022, according to Legal & General Investment Management (LGIM).

LGIM’s DB Health Tracker, a monitor of the current health of UK DB pension schemes, found that a typical DB scheme can expect to meet 98.8% of accrued pension benefits as of 30 June 2022. This is a rise of 0.3 percentage points from the figure of 98.5% recorded three months earlier on 31 March 2022.

The health of the UK’s DB pension schemes has been gradually improving since March 2020, when it had dropped as low as 91.4% because of the immediate impact of the pandemic on financial markets, the asset management firm stated.

This gradual improvement is a timely reminder that ‘endgame’ is in sight for the majority of DB pension schemes in the next five to 10 years, it continued, adding that the high value indicates that many DB schemes are in a strong position as they approach endgame and decide the best strategy to ensure their members’ benefits are met.

While these figures demonstrate a continued improvement in the health of UK DB schemes, LGIM said, the months ahead are crucial for both pension schemes and other investor groups.

John Southall, head of solutions research at LGIM, said: “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 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.”

Christopher Jeffery, head of rates and inflation strategy at LGIM, said: “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, Jeffery added.

“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,” he said.

Further analysis is needed on Pensions Dashboards Programme’s design standards, says PLSA

The Pensions and Lifetime Savings Association (PLSA) has identified ”many important technical issues” with the Pensions Dashboards Programme’s (PDP) design standards – which has seen its consultation and call for input close yesterday – where further analysis is needed before the standards can be settled.

“Do users expect and want to see figures within two seconds, as proposed; how can multiple warnings be displayed so as not to confuse users; how will users react to possible matches; and will most users use dashboards on their phones, as expected?,” asked Nigel Peaple, director of policy and advocacy at the PLSA.

“Of course, no-one will be sure whether the standards are fully correct until dashboards are operating and savers are interrogating their pension data. We expect iterations of the standards to be necessary in the future, but we would like PDP to seek the right balance between perfecting the standards via future amendments and the number of iterations required of pension schemes and providers,” he added.

“We have consistently asked for extensive user testing in respect of understandability, and we believe this should still happen and feed into the standards,” Peaple said.

”It is disappointing that PDP, having chosen the summer to consult, did not consider at least an 8-week consultation period to give organisations more time to work across departments/teams and give fuller feedback in certain areas,” the association stated in its response.

The standards by their nature are not the finished articles and only when dashboard users are interrogating their pension data will it be known if the standards work.

“We expect iterations of the standards to take place, but we would like a balance to be struck between what is necessary and not overburdening pension schemes and providers with too much change too often,” the PLSA noted.

Actuaries urged to consider impact of high inflation

The Institute and Faculty of Actuaries (IFoA) has today issued a risk alert to all its members on the impact of high inflation, aiming to help bring to their attention how current significantly high levels of inflation may affect actuarial practice.

The risk alert has a particular focus on actuaries working in general and life insurance and pensions, but it states that all members, regardless of practice area, should consider adjusting their work by taking appropriate consideration of:

  • expectations of future inflation and rationale for selections;
  • different types of inflation, where relevant;
  • the impact of the current high-inflation environment on underlying methodologies;
  • the quantification of uncertainty to ensure the user of the work understands the potential range of plausible and possible outcomes.

Neil Buckley, IFoA regulatory board chair, said: “The actuarial profession is a key part of the global financial sector which has not operated in a high-inflation environment, such as the current one, for many years. We know that members will be aware of the uncertain economic environment and rapidly changing market conditions. By issuing this risk alert, we are aiming to bring this issue to the attention of the profession and support members by alerting them to some areas of work which need careful consideration.”

He added: “As a royal chartered professional body and regulator, it is our role to highlight external factors that will have significant impact on actuarial practice. It is crucial that we ensure that both the IFoA and its members are acting in the public interest.”

For the pensions and life insurance sector, the alert further stated that members working within the sector could be faced with increased challenges in managing investments or hedging strategies for inflation-linked liabilities.

There could be an enhanced risk where actuaries cannot match underlying liabilities with a suitable asset or choose to adopt “delta-hedging” as an approximate matching technique. Both higher levels of inflation and possible increased volatility may mean that monitoring and re-balancing become expensive or problematic.

Those working in pensions and/or life insurance may wish to consider the following:

  • retirement factors for deferred members may require to be reviewed to ensure that they are appropriate and consistent with preservation legislation;
  • the need to consider any matching or mismatched exposure;
  • the impact of any caps and collars on cashflows;
  • possible member or political pressures to ignore caps or apply discretionary increases, especially where the cost of living is outstripping pension increases; and
  • the likelihood of inflation causing underpinning biting in the future.

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