Defined benefit (DB) schemes saw their average deficit increase by 5.1 per cent in the first quarter of 2020, according to Legal & General Investment Management (LGIM).

The firm’s DB Health Tracker found that the average DB scheme could expect to pay 91.4 per cent of accrued pension benefits as of 31st March, down from 96.5 per cent in December 2019.

The analysis, which takes into account the risk that a sponsor might default and the impact that would have on scheme’s members, had then identified a 2.8 per cent improvement in expected payment of accrued pension benefits from the end of September.

The first quarter deficit increase was attributed to a fall in the value of return-seeking assets amid the coronavirus crisis, while falls in gilt yields led to an increase in nominal liabilities relative to many schemes’ hedging assets.

LGIM head of solutions research, John Southall, said measures of ‘expected proportion of benefits met’ were “volatile, albeit less volatile than traditional funding level measures” and noted that impact on the measure since the start of the second quarter had “generally been positive” but the negative impact of the coronavirus crisis on typical covenant strength will become clearer.

Southall commented: “Schemes with significant allocations to credit may be able to help close these gaps by moving towards more cashflow matched strategies if they haven’t already done so, as well as increasing their rates and inflation hedging levels.

“A number of factors determine how manageable a pension scheme’s deficit is, not just its size. This includes the strength of the sponsor, the size of the deficit relative to the size of the assets, the quality of the investment strategy, and the economic and demographic risks in the scheme.”

LGIM head of rates and inflation strategy, Christopher Jeffery, said: “The first quarter delivered exceptionally weak returns across a broad range of risk assets. The coronavirus pandemic, and the associated shutdown in economic activity, has led to a sharp reappraisal of expectations for both earnings growth and default risks.

“Global equity markets dropped by a third from their mid-February peak and spreads on major corporate bond indices widened by over 250bp. Despite the pending deluge of government bond supply to fund stimulus programmes, yields dropped sharply as central banks cut interest rates and reactivated bond purchase programmes.”

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