Market stability through November and December saw both hedged and unhedged schemes’ funding levels steadily improve and reduce deficits after prior months of significant volatility, according to the latest update from the Broadstone Sirius Index.

The index, which looks to track the progression of pension schemes to low-dependent or ‘self-sufficient’ status, revealed that, as with the rest of 2022, rising interest rates have impacted asset valuations less for a 50 per cent hedged scheme.

This resulted in a larger funding improvement for the 50 per cent hedged scheme over the past two months, compared to the fully hedged scheme.

Indeed, according to the tracker, although both schemes started the year at an 80 per cent funding level, the scheme with only 50 per cent of liabilities hedged ended the year at 95 per cent compared to 71 per cent for the fully hedged scheme’s funding position.

However, the index showed that, “crucially”, both model schemes have reduced their deficits as assets, liabilities and therefore the deficit are all much smaller now, with the buy-out deficits at end the year much lower than the £18.5m seen at the start of the year.

According to Broadstone, this has decreased to £13m where liabilities were fully hedged and £6m where only 50 per cent of liabilities were hedged.

Reflecting on the findings, Broadstone head of consulting and actuarial, Nigel Jones, suggested that this period of relative calm could be a useful time for schemes, whether they have hedged previously or no, to assess the impact of the turbulence seen in long-dated gilt yields.

He continued: “Trustees and sponsors should be using this time to engage with their investment consultants and liability-driven investment (LDI) managers to understand the impact on assets as well as reviewing their investment strategy and journey plan for the revised deficit.

“The dramatic reductions in the gaps to buyout for sponsors of all shapes and sizes is further good news and consideration should be given to preparing for an approach to the insurance market in many cases.

“However, the immediate macro-economic environment remains murky. Trustees and sponsors should be mindful of the risks caused by any future falls in asset values stemming from rising long-term interest rates and/or impending recession.

“2022 may well have been a good year for the deficit size of schemes but many risks remain.”

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