Deficits of UK pension schemes have decreased by c.£45bn over the month to 30 May 2022 against long-term funding targets, an analysis from XPS’s DB:UK funding tracker has revealed. The 25% reduction was primarily driven by a further rise in gilts yields as well as a fall in long term inflation expectations.
Based on assets of £1,689bn and liabilities of £1,841bn, the average funding level of UK pension schemes on a long-term target basis was 91.8% as of 30 May 2022. XPS estimates that at the end of May 2022 the average pension scheme would need an additional £15,000 per member to ensure it can pay their pensions into the long-term.
Funding levels over May were volatile. Liabilities fell due to rising gilt yields and lower expectations of long-term inflation. Despite ongoing concerns about short term inflation and the rising cost of living, long-term inflation expectations fell over the month helping to reduce deficits further.
Charlotte Jones, Senior Consultant at XPS Pensions Group said: “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% 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.”