Typical DB pension scheme can fund 98.4% of benefits in ‘new high’

The health of defined benefit (DB) schemes in the UK reached a “new high” in Q4 2021, with the typical scheme expected to be able to fund 98.4 per cent of accrued pension benefits, according to Legal & General Investment Management (LGIM).

The typical scheme being able to fund 98.4 per cent of accrued benefits, as at 31 December 2021, was 0.1 percentage points higher than the 98.3 per cent figure recorded at the end of Q3 2021.

LGIM noted that the health of DB schemes had been gradually improving since March 2020, when it had dropped to as low as 91.4 per cent due to the immediate impact of Covid-19 on financial markets.

Furthermore, although the latest figures demonstrated “continued improvement”, LGIM warned that the next 12 months will be crucial for schemes and other investor groups due to the move into an era of tighter monetary policy.

“The final quarter of 2021 saw continued strong performance from growth assets which helped our measure of UK scheme health edge to its strongest recorded position yet,” commented LGIM head of solutions research, John Southall.

“Scheme health also benefitted from a modest drop in inflation expectations, falling back from the elevated levels we saw in the third quarter (the highest levels since 2008). However, this was offset by a slight decrease in long-term interest rates. Overall, 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.”

“As for previous quarters, we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects current covenant strength. However, the long-term impact of the pandemic on DB schemes’ health remains unclear. It is worth noting that if a B rating was assumed instead, the EPBM figure would be around 1.1 per cent lower.”

LGIM head of rates and inflation strategy, Christopher Jeffery, added: “The fourth quarter of 2021 had plenty of twists and turns, but the ultimate outcome in financial markets was more of the same: equity market buoyed by the ongoing economic recovery, short-dated interest rates rising, and inflation overshooting expectations. Despite those headwinds, long-dated gilt yields which matter the most for discounting pension fund liabilities were almost totally unfazed.”

“For sterling investors, the most important news came towards the end of the quarter with the first hike in interest rates by the Bank of England for four years. Followed by a further increase in rates today, the Old Lady of Threadneedle Street has signalled that the days of benign neglect about the inflation outlook being over, ‘forward guidance’ has been abandoned as a policy tool, and balance sheet reduction will soon be upon us. 2022 looks to be a pivotal year for investors as the market navigates the transition from easy to tightening policy conditions both at home and abroad.”

LGIM's analysis was based on the assumption in the Pension Protection Fund's (PPF) Purple Book that a typical DB scheme holds approximately 20 per cent in equities, 70 per cent in bonds/LDI, 5 per cent in property and 5 per cent in other assets, and its own assumption of rates and inflation hedge ratios of 70 per cent of liabilities on a gilts basis, and no future accrual or deficit contributions.

    Share Story:

Recent Stories


Making pension engagement enjoyable through technology
Laura Blows speaks to Nick Hall, business development director and Chartered Financial Planner at UK-based Wealth Wizards about the opportunities that technology provides for increasing people’s engagement with pensions and increasing their retirement wealth.

ESG & DC – creating the right tools
In the latest of our series of Pensions Age video inteviews Francesca Fabrizi, Editor in Chief of Pensions Age is joined by Manuela Sperandeo, Head of Sustainable Indexing EMEA, BlackRock and Mark Guirey, Executive Director, Asset Owner and Consultant Coverage - MSCI to discuss some key trends of ESG investing among UK pension funds today

Multi asset credit
Pensions Age editor, Laura Blows, discusses multi asset credit with Royal London Asset Management senior fund manager, Khuram Sharih
Pensions Age podcast: buy-outs and buy-ins for member and employer nominated trustees
Pitfalls and good practice when approaching insurers with Pensions Age editor, Laura Blows, Martin Parker (Just Group) and Akash Rooprai (ITS)