Legal & General Investment Management (LGIM) has encouraged defined benefit scheme trustees to revisit their liability driven investment (LDI) strategies following a "substantial fall in interest rates".

LGIM's health tracker, a monitor of the current health of UK DB pension schemes, found that the average DB scheme can expect to pay 93.7 per cent of accrued pension benefits as of 30 September 2019, a drop of 1.3 per cent on the previous quarter in their 'expected proportion of benefits met' metric.

LGIM head of solutions research, John Southall, said: “This [fall] was mainly driven by a substantial fall in interest rates, which had a negative impact on schemes that haven’t fully hedged themselves against moves in bond yields. We believe that trustees could stand to benefit from revisiting their LDI strategies, using leverage where appropriate.”

The quarterly analysis, which takes into account the risk that a sponsor might default and the impact that would have on scheme’s members, found that 6.3 per cent of accrued pension benefits would not be paid on average across their scenarios.

LGIM said that how manageable a pension scheme’s deficit is dependent on a number of factors, and not just its size. This includes the strength of the sponsor, the size of the deficit relative to the size of the assets, the quality of the investment strategy, and the economic and demographic risks in the scheme.

LGIM head of multi-asset funds, John Roe, added: “The collapse in global bond yields, driven by the Federal Reserve’s pivot to cut interest rates, is an unwelcome reminder that UK interest rates and inflation remain outsized risks for many UK DB pension schemes.

"In these circumstances, trustees and their advisers shouldn’t focus on what they think will happen in those markets, but whether they can afford the cost of being wrong – a close parallel with the questions active managers have to ask when assessing the risk of any one view, no matter how high their conviction.

“With global equities close to all-time highs and sterling still relatively weak, returns from pension scheme growth assets remain strong. At the end of the quarter, economic pessimism was close to its peak for the year, pushing down on bond yields.

"But as yields recover, so too should average funding levels and more schemes will likely turn to further de-risking through liability hedging. When doing this, schemes should bear in mind that credit spreads on corporate bonds remain close to mid-2018 lows, which in turn might justify gradually averaging into any further credit allocations.”

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