UK DB deficits down £33bn as gilt yields continue to rise

UK defined benefit (DB) pension scheme deficits against long-term funding targets fell by £33bn to £242bn in April, according to XPS Pensions Group’s DB:UK Funding Tracker.

The average funding level of UK pension schemes on a long-term basis increased slightly to 87.6 per cent as of 27 April 2022, with the average scheme estimated to need an additional £24,000 per member to ensure it can pay pensions into the long-term, down from £25,000 in March.

This was based on assets of £1,946bn and liabilities of £1,705bn, and was attributed primarily to a continued rise in gilt yields, as well as a fall in long-term inflation expectations.

Indeed, XPS explained that 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 actuary, Tom Birkin, stated: “With the Bank of England widely expected to increase interest rates for a fourth time this week to combat surging inflation, the yield on long-term gilts reached over 2 per cent in late April for the first time since 2015.

“This is good news for pension schemes who will have seen their liabilities decrease as a result, but comes at a time where pensioners are battling against the rising cost of living.

“Trustees will have to weigh up any potential opportunities to de-risk and lock in some these gains against the option of providing additional increases to member pensions.”

Industry experts have also raised concerns around the 'difficult decisions' that could face pension scheme trustees in relation to inflation-linked discretionary increases, after analysis suggested these could add up to £8bn to DB liabilities.

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