Defined benefit (DB) pensions in the UK will look increasingly well-funded as the rise in AA corporate bond yields is sustained, according to a report by Bloomberg Intelligence (BI).

It noted that insurers were set to benefit as they assist companies in offloading their pension liabilities.

Following the increased volume of buy-in and buyout activity last year, this trend is likely to continue in 2024 as bond yields have recovered and stabilised, the report said.

Under the IAS 19 rule, AA+ corporate bond yields that are used to discount DB pension liabilities are up “sharply” year-on-year.

Yields have steadily increased since July 2021 and, while there has been some volatility this year, higher average yields were likely the “new normal”.

The rise has outpaced the spike observed amid Covid-19, which drove yields up sharply in March 2020.

The improvement in AA corporate bond yields was driven by rising interest rates combined with geopolitical uncertainty, according to BI.

Commenting on the report, BI senior industry analyst (insurance), Kevin Ryan, said: “It's clear that many companies view staff pensions as both a distraction and unwelcome liability, so we expect the trend to outsource the liability to continue.

“This is broadly good news for insurance companies with two sources of profit: Underwriting and investment income.

“Many companies' DB plans should begin to appear better funded, making these more attractive to the buy-in, buyout market.

“Still, challenges remain, with insurers uniquely qualified to manage them for pension fund clients.”

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