UK DB long-term funding progress could be 'set back' 10 years amid Covid-19

Whilst defined benefit (DB) pension schemes’ positions have improved since the first lockdown in March 2020, DB schemes' progress in achieving long-term funding targets may have been set back by as much as 10 years, according to XPS Pension Group’s DB:UK Tracker.

The tracker showed that, since the first lockdown in March 2020, gilt yields and long-term inflation expectations had risen by 1.1 per cent, reducing the value of liabilities for most pension schemes, with UK deficits recovering around £195bn amid the strong market recovery.

This was based on assets of £1,742bn and liabilities of £2,034bn, with an average funding level for UK pension schemes on a long-term target basis of 86 per cent as at mid-March 2022.

However, the tracker also showed that recent rises in long-term inflation expectations and lower projected investment returns may have set back schemes’ progress in achieving their long-term funding targets by as much as 10 years.

According to the analysis, deficits are now around £50bn higher than they were in December 2019, meaning that schemes are £150bn worse off than previously projected.

Furthermore, whilst the analysis suggested that employers maintaining their contributions could reduce the term by six years, with schemes protected to reach their long-term targets in 2029, this is projected to cost sponsoring employers nearly £75bn.

Commenting on the figures, XPS senior consultant, Charlotte Jones, commented: “Whilst it might be comforting to many schemes that their deficits haven’t increased markedly after a difficult two years, it’s easy to forget that the pandemic has taken its toll on their long-term funding journey.

“With high inflation and market uncertainty set to continue, trustees need to be carefully monitoring their funding position and investment strategy to ensure their long-term plan remains on track.”

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