The aggregate funding level of UK defined benefit (DB) pension schemes improved by around £400bn over the course of 2022, representing an around 20 per cent improvement on a long-term target basis, analysis from XPS Pensions Group has revealed.

This was based on assets of £1,456bn and liabilities of £1,394bn, with an aggregate funding level of UK pension schemes on a long-term target basis of 104 per cent recorded as of 20 December 2022.

This is despite analysis from XPS suggesting that typical asset portfolios have fallen by around 20 per cent, as equity markets struggled and credit suffered as the threat of inflation and tighter monetary policy loomed over much of the year.

XPS explained that following the "significant volatility" seen in 2022, long-term gilt yields ended the year around 3 per cent higher than they were at the start, prompting a 35 per cent reduction in the value of pension scheme liabilities.

According to the group, inflation also proved a source of considerable impact for some schemes, as XPS explained that the sharp rise in observed inflation combined with caps meant some pensioners income began to fall behind the rising cost of living.

However, the group explained that schemes were relatively protected as long-term inflation levels, while fluctuating during the year, ended the year only slightly higher than they started and therefore have not significantly impacted funding levels.

XPS Pensions Group actuary, Tom Birkin, stated: “From February’s shock Russian invasion of Ukraine to the gilt market meltdown in October, 2022 has been a year of seismic market movements – and the upshot for pension schemes is that most find themselves in a much healthier position than they were at the start of the year.

“With more schemes in surplus and insurer premiums now looking more affordable than ever, lots of schemes will be contemplating buyout to lock-in the huge gains they have achieved during 2022.

"On the supply side, the UK bulk annuity market appears to be gearing up for a record year with unprecedented demand from pension schemes seeking to secure the long-term future for their members”.

Share Story: