The aggregate funding level of UK defined benefit (DB) pension schemes rose to 103 per cent in October, although the recent volatility is expected to have taken a "substantial toll" on some schemes, according to XPS Pensions Group.

XPS's DB:UK funding tracker estimated that combined UK pension scheme surplus increased by £13bn during the month to an estimated £48bn as at 28 October 2022, based on assets of £1,504bn and liabilities of £1,456bn.

The findings suggested that DB schemes have managed to weather recent volatility in the gilt market, as XPS noted that funding levels at the end of October were broadly in line with estimates at the beginning of the month.

Indeed, the firm explained that although rises in gilt yields at the start of the month continued trends seen in September, these were offset by falls later in the period as the UK Government reversed course on a number of economic policies that were poorly received by the market.

However, the long-term impact of the recent volatility may not yet be clear, as XPS Pensions noted that the additional collateral calls may have forced some schemes to choose between maintaining hedging levels or to retain the cash in growth assets.

XPS Pensions also clarified that whilst the actual aggregate level of hedges that have been reduced are not known, individual scheme decisions will have affected scheme funding towards the end of the month as yields fell "significantly".

In particular, XPS estimated that for every 10 per cent of hedging that was taken off at the peak on 11 October, a scheme’s funding level will be 2 per cent worse than it would have otherwise been if the hedging level was not reduced.

XPS Pensions group senior investment consultant, Felix Currell, stated: “It was a chaotic start to the month for pension schemes, with many of our clients concerned with the impact that LDI calls were having on their schemes and liquidity.

"Whilst a small minority of schemes will have been forced into choosing between maintaining hedging levels and targeting investment returns, XPS DB:UK reminds us that the improvements in funding positions over September have left many schemes in a fantastic position to achieve their long-term objectives.”

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