UK DB schemes facing additional £46bn in liabilities amid inflation rises

Defined benefit (DB) pension schemes' liabilities are estimated to have increased by around £46bn between 1 September to 15 September 2021 due to a fall in net interest rates, according to XPS’s DB:UK Funding Tracker.

XPS noted that UK inflation has risen by 3.2 per cent over the year to 31 August 2021, the highest annual increase in prices since 2012, with pension schemes facing the additional concern that the long-term inflation expectations are also rising, potentially leading to increased member benefits and liabilities.

It acknowledged, however, that the impact on individual schemes will vary “considerably” as highly hedged schemes will be largely protected, while schemes with limited inflation protection may see significant worsening in funding.

Considering this, XPS suggested that with many pension schemes in an improved situation from recent strong growth market performance, it may be a sensible time to review the inflation exposure in place, warning that the impact of rising inflation on growth assets is "more unclear".

XPS Pensions Group senior consultant, Felix Currell, commented: “The speed of the recovery of the supply-side of the global economy and the impact of further stimulus in the US will be key factors in the ongoing performance of equity markets.

“Pension schemes will be concerned about the ability of markets to keep pace if inflation reaches very high levels, particularly if interest rates are raised early to combat prevailing inflationary fears.

“Real assets with contractual inflation linkage may therefore prove to be an attractive option for schemes concerned about these negative effects on their growth portfolio.”

    Share Story:

Recent Stories

A time for fixed income
Francesca Fabrizi discusses fixed income trends and opportunities with Goldman Sachs Asset Management Head of UK Pensions Solutions, Fixed Income Portfolio Management, Henry Hughes, in our Pensions Age video interview

Purposeful run-on
Laura Blows discusses purposeful run-on for DB schemes with Isio director, actuarial and consulting, Matt Brown, in Pensions Age’s latest video interview
Find out more about Purposeful Run On

Keeping on track
In the latest Pensions Age podcast, Sophie Smith talks to Pensions Dashboards Programme (PDP) principal, Chris Curry, about the latest pensions dashboards developments, and the work still needed to stay on track
Building investments in a DC world
In the latest Pensions Age podcast, Sophie Smith talks to USS Investment Management’s head of investment product management, Naomi Clark, about the USS’ DC investments and its journey into private markets