Defined benefit (DB) schemes are now healthier than in pre-Covid times following continued recovery through Q4 2020, according to Legal & General Investment Management (LGIM).

The firm’s health tracker, which monitors the condition of DB schemes, found that the average DB scheme could expect to pay 97.1 per cent of accrued benefits as of 31 December 2020, an increase of 1.6 percentage points from the end of the previous quarter.

LGIM head of solutions research, John Southall, said: “This change was almost entirely driven by outperformance of growth assets with interest rates and expected inflation broadly flat over the quarter.”

This is also 0.6 percentage points higher than the 31 December 2019 reading of 96.5 per cent, the last quarterly reading before the market felt the impact of the Covid-19 pandemic.

Following this impact, the expected proportion of benefits met (EPBM) reading sank to 91.4 per cent.

Despite the new reading indicating a third successive quarter of growth, LGIM cautioned that it was important to note that the figures could still underestimate the impact of the pandemic due to a weakening of covenants that many schemes might have endured.

Southall said: “That said, we would caution optimism, as the extent of covenant deterioration remains unclear with a large variation in impact across sponsors. Our calculations are based on a typical BB sponsor rating. If this were to fall to B, for example, we would anticipate an EPBM value around 2 per cent lower.”

LGIM head of rates and inflation strategy, Christopher Jeffery, commented: “Stars aligned for the resolution of several key market uncertainties in the fourth quarter of last year. Risk assets welcomed a new US president, a UK-EU free trade agreement and the first licensed vaccines against Covid.

“That combination of events saw a significant upgrade to 2021 global growth forecasts and an associated powerful rally in risk assets. Outside of the UK, the better global growth outlook combined with expectations of fiscal stimulus under a new democratic administration drove yields and inflation expectations higher.

“The outlook for markets in the year ahead is likely to be principally determined by the success or failure of vaccine roll-out in the major economies. It is early days on that front, but the initial prognosis, particularly in the UK and US, is positive.”

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