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UK pension schemes soar into surplus as gilt yields rise following Chancellor’s budget

UK pension schemes soar into surplus as gilt yields rise following Chancellor’s budget

04 Oct 2022

· UK pension schemes have become over 106% funded on a long-term target basis following the market’s reaction to the government’s mini budget.

· UK pension schemes surpluses grew by £94bn during the month to 29 September 2022.

· Gilt yields rising by 0.8% and long-term inflation expectations falling by 0.3% over the period, reduced the value of schemes’ liabilities and continued the trend seen during 2022.

· For schemes that are now 100% funded, there may be opportunities to lock in recent gains and to review their ultimate end-game strategy.

UK pension schemes’ funding positions have increased by c.£94bn over the month to 29 September 2022 against long-term funding targets, an analysis from XPS’s DB:UK funding tracker has revealed. Based on assets of £1,451bn and liabilities of £1,363bn, the aggregate funding level of UK pension schemes on a long-term target basis was 106.5% as of 29 September 2022.

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Drivers of the change

Following the Chancellor’s mini budget on 23 September the market has seen the biggest swings in gilt yields in recent times with gilt yields closing the month having risen 0.8%. Rising gilt yields continued to be the main contributor to improvements in funding levels during September with the continued fall of long-term inflation expectations further improving the situation. This adds to the improvements in long-term positions that we have seen over 2022 – now in excess of £410bn for the year. Despite equity and credit markets struggling over September, with most schemes not being fully hedged the increase in gilt yields will have led to funding positions improving, especially compared to their longer-term targets.

Ben Gold, Head of Investment at XPS Pensions Group said: “The last week will long be remembered for the Bank of England intervening to stabilise the gilt markets. The impact on pension schemes has been considerable. Strategically it’s been hugely positive as funding positions have significantly improved. But operationally it’s been very challenging as schemes have tried to ensure their liability driven investments remain sufficiently collateralised, and many are still assessing the impact. It is expected that hundreds of schemes will have had their hedging reduced to some extent. This is likely to lead to some permanent changes to LDI funds and how liability risks are hedged in future. That said, we shouldn’t forget the huge improvement in funding position many schemes have seen. Quantifying that and considering how they react to that should be a key focus of attention for schemes.”


XPS DB:UK tracks the funding position of UK defined benefit (DB) pension schemes on a long-term target basis and allows real time monitoring of changes and analysis of the reasons behind any movement.

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