UK defined benefit (DB) pension scheme deficits against long-term funding targets increased "relatively modestly" by £7bn last month, despite total assets falling by £25bn amid Russia's invasion of Ukraine, XPS Pension's DB:UK Funding Tracker has revealed.

The tracker showed that the average funding level of UK pension schemes on a long-term target basis was 85 per cent as of 28 February 2022, with a total deficit of £320bn as at 28 February, up from £313bn on the 1 February, and £307bn as of the end of January.

Based on this, XPS also estimated that the average scheme would need an additional £31,000 per member to ensure it can pay pensions in the long-term.

The movement in the deficit was attributed to a £25bn fall in asset values to £1,777bn, which XPS highlighted as demonstration of the “significant impact” of the Russian invasion of Ukraine.

Liabilities, meanwhile, fell to £2,097bn, due to a continued rise in gilt yields, although this was partially offset by further rises in inflation.

The firm noted that whilst this movement will have generally been beneficial for those pension schemes that are not yet fully hedged, a simultaneous decline in growth market assets will have negatively impacted most UK pension scheme funding levels over the month.

Looking ahead, the firm also suggested that equity markets should be expected to remain volatile for the time being, particularly in light of the "significant swings" experienced by global markets over the past month as the likelihood of conflict in Ukraine increased.

In addition to this, inflation was highlighted as a “forefront” concern for investors, as XPS warned that cost-push inflation can be expected to put upwards pressure on prices, introducing further challenges for monetary authorities already stretched with post-Covid efforts.

Commenting on the figures, XPS chief investment officer, Simeon Willis, said: “The scope for the situation to deteriorate further is self-evident. However, markets are forward looking and therefore current news and the potential for further deterioration may already be factored into prices.

“Consequently, this may not represent a sensible time for wholescale changes in strategy. That said, if your portfolio does not currently reflect your risk tolerance and you wish to make changes, it is important to recognise the significant intra-day price fluctuations.

“This can be managed by approaches such as pre-investing trades to reduce time out of the market and breaking up transactions across a number of smaller trades.”

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