The XPS Pensions Group’s DB:UK funding tracker has revealed that UK pension schemes have become 100% funded on a long-term target basis for the first time since aggregated records began.

For schemes that are now 100% funded, there may be opportunities to lock in recent gains and to review their ultimate end-game strategy, the firm stated.

UK pension scheme deficits against long-term funding targets fell by a further £69bn (€80bn) over the month to 31 August 2022 against long-term funding targets, the funding tracker has revealed.

Based on assets of £1.6bn and liabilities of £1.6bn, the aggregate funding level of UK pension schemes on a long-term target basis was 100.2% as of 31 August 2022.

Rising gilt yields, the data showed, continued to be the main contributor to improvements in funding levels during August, partially offset by a small rise in long-term expectations of inflation.

Gilt yields rose by 0.7% over the period, reducing the value of schemes’ liabilities and continuing the trend seen during 2022, the tracker’s data disclosed.

This added to the improvements in long-term positions seen over 2022 – now in excess of £330bn for the year. Equity markets struggled over August but performance was pushed back into positive territory for many UK pension schemes, due to depreciation of sterling over the month.

Matching assets continued to fall alongside liability values, but this remains beneficial for schemes that are not fully hedged, particularly when looking at longer-term assumptions.

Tom Birkin, actuary at XPS, said that following the Department for Work and Pensions’ (DWP) long-awaited consultation on defined benefit funding rules and long-term funding objectives at the end of July, the average UK pension scheme is now fully funded on a long-term basis, however, “there may not be as many schemes having to take drastic action as a result of the new regulations as once thought”.

He added: “Now is an excellent opportunity for schemes to consider their investment strategies to ‘lock in’ these significant gains and to think about what the ultimate end-game for the scheme might be. This is good news for pension scheme members as securing members benefits is within reach for more schemes than ever before.”

FTSE 350 pension schemes surplus continues to fend off impact of rising costs

The accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased by £7bn over the course of August, standing at a total surplus of £9bn by 30 August 2022, according to Mercer’s Pensions Risk Survey.

Liabilities fell from £709bn at 29 July 2022 to £657bn at the end of August driven by rising corporate bond yields offset by a rise in the market’s view of future inflation. Asset values also fell over the period to £666bn compared to £711bn at the end of July, a fall of £45bn which reduced the impact of the liability falls.

Matt Smith, principal at Mercer, said: “The August aggregate funding position on an accounting basis has remained in surplus, despite inflation expectations rising. But the aggregate funding position has been volatile over August 2022 and there is no sign that stability is around the corner.”

He added: “Bond yields jumped through the 4% mark – the first time for eight years – and inflation expectations continue to increase. While rising inflation creates many challenges for individuals and businesses, it will be a welcome relief that pension schemes’ funding continues to fend off these effects.”

He noted that with the cost of living continuing to rise and members’ personal finances expected to be squeezed over the remainder of the year, “schemes may see increased member activity as members explore options to bolster household incomes”.

He said that trustees and sponsors would play a key role in ensuring members understand their options and receive “fair value for their benefits”.

Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.

The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by The Pensions Regulator and elsewhere tells a similar story.

Read the digital edition of IPE’s latest magazine