UK defined benefit (DB) pension schemes saw further improvements in funding levels in August, according to Broadstone’s latest Sirius Index, driven by record high gilt yields amid growing concerns over government borrowing and persistent inflation.

The index, which tracks the performance of various pension scheme strategies on their journeys to self-sufficiency, showed that a fully hedged scheme recorded a modest funding gain of 0.2 percentage points through the month, reaching 71.1 per cent.

This meant that the deficit fell to its lowest level since tracking started at the beginning of 2022.

Schemes with less protection against interest rate movements saw the most significant boost, however, with the 50 per cent hedged scheme rising from 107.2 per cent funded in July to 109.0 per cent.

This is its highest level since the index launched, and also represents the largest monthly gain recorded to date.

Broadstone senior investment consultant, Daniel Broad, noted that while most DB pension schemes continued their positive funding level progress in August, schemes that are not fully-hedged made “particularly impressive” gains.

“During the month, medium and long-term UK gilt yields experienced a notable increase, driven by heightened investor concerns over government borrowing and persistent inflation, alongside structurally lower demand from traditional buyers,” he continued, adding that when gilt yields are more volatile, a scheme’s liability hedge ratio may deviate from its target and introduce "unwanted risk."

“Therefore, we suggest schemes rebalance as required and be prepared for capital calls from LDI de-leveraging events,” cautioned Broad.

The latest funding update comes as long-dated borrowing costs have climbed to their highest level in nearly three decades, with 30-year gilt yields reaching around 5.6 per cent in early September, the highest among G7 nations.

Analysts have described the surge as a “pre-Budget blow” for the government, although Bank of England governor, Andrew Bailey, has since warned against “exaggerating” the rise, suggesting that it is primarily caused by "structural changes" in demand for gilts.

Despite market volatility, DB schemes remain in good health, with estimates indicating that aggregate surpluses have held firm at over £200bn in recent months, while average funding levels have risento 105 per cent.

---