The average defined benefit (DB) pension scheme in the UK can expect to reach its long-term target in less than four years under the proposed new funding code rules, according to XPS Pensions Group’s DB:UK Funding Tracker.

It also found that DB schemes’ deficits against long-term funding targets decreased by £45bn in May to £152bn.

This is a 25 per cent reduction from the start of the month’s £197bn deficit, with the fall being primarily driven by a further rise in gilt yields as well as a reduction in long-term inflation expectations, according to XPS.

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 per cent as of 30 May 2022, and XPS estimated that the average pension scheme would need an additional £15,000 per member to ensure it can pay their pensions into the long term.

XPS pointed to several factors as driving the change in May, such as volatile funding levels and a fall in liabilities 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.

XPS Pensions Group senior consultant, Charlotte Jones, commented: “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 four years meaning that it is becoming increasingly important for schemes to prepare ahead of their conclusion.”

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