DB schemes' health reaches new high

The health of the UK’s Defined Benefit (DB) pension schemes reached a “new high” as of the end of June 2022, Legal & General Investment Management (LGIM) has revealed.

LGIM’s DB Health Tracker found that UK DB schemes could expect to pay 98.8 per cent of accrued benefits as of 30 June 2022, representing a 0.3 percentage point increase on the 98.5 per cent recorded on 31 March 2022.

It also showed that the health of UK DB pension schemes has been gradually improving since March 2020, when it had dropped as low as 91.4 per cent because of the “immediate” impact of the pandemic on financial markets.

LGIM highlighted the gradual improvement as a timely reminder that the endgame is in sight for the majority of DB pension scheme “in the next five to 10 years”.

However, it also warned that while the figures demonstrate a continued improvement in the health of UK DB schemes, the months ahead remain “crucial” for both pension schemes and other investor groups.

Commenting on the update, LGIM head of solutions research, John Southall, stated: “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.”

“The fact that the measure means it is impossible for schemes to be more than 100 per cent healthy makes large increases in EPBM challenging. However, it is encouraging to see the security of members benefits continue to improve.”

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