Half-hedged scheme funding levels reached 98.2 per cent at the end of September, bringing them closer to low dependency status, according to the Broadstone Sirius Index.

Funding levels crept up by 0.9 per cent, from 97.3 per cent in August, signalling a shift in towards low dependency, which is reached when assets and liabilities for a defined benefit (DB) scheme are matched and the investment strategy is low risk, so that reliance on the employer is not expected to be an issue in the future.

The Broadstone Sirius Index, which monitors the performance of schemes in relation to self-sufficiency, showed that the picture was different for fully hedged schemes.

While funding levels have been stable, levels for fully hedged schemes slipped from 68.6 per cent to 68.4 per cent over the same period.

In a year which has seen markets navigate rising interest rates, with falls in both assets and liabilities that protect funding levels, Broadstone head of trustee services, Chris Rice, commented: “It is good news that the half-hedged scheme we track is beginning to near full funding on a low dependency basis.”

"The Pensions Regulator has been on a clear trajectory over recent years to reduce risk of underfunding in pension schemes and lessen the reliance on employers and investment returns to plug funding gaps,” Rice said.

“This direction of travel may be under challenge from the government’s latest initiatives. However, in our experience pension schemes and their sponsors are content to continue on the journey to low dependency and then on to potential buyout.

“The next steps for both schemes will potentially be deciding when the time is right to fully work towards implementing a low dependency investment strategy to reduce the reliance on the employer.

“Trustees need to be having discussions with their scheme actuaries and investment consultants around their best path to low dependency and, ultimately, buyout.”

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