UK defined benefit (DB) pension scheme funding levels saw significant improvements over the past month, after gilt yields faced an unprecedented increase following the government's mini-Budget, industry trackers have revealed.

XPS Pensions’ DB:UK funding tracker showed that UK DB schemes' surplus grew by £94bn in the month to 29 September, with an aggregate funding level on a long-term target basis of 106.5 per cent, based on assets of £1,451bn and liabilities of £1,363bn.

The improvements were attributed to rising gilt yields over the past month, while the continued fall of long-term inflation expectations further improved the situation, according to XPS Pensions Group.

Gilt yields saw unprecedented increases following the Chancellor’s mini budget on 23 September, and closed the month having risen 0.8 per cent, after the Bank of England announced interventions to help restore market order.


However, XPS head of investment, Ben Gold, clarified that while the market volatility has been "hugely positive" for DB funding positions, operationally it’s been "very challenging" as schemes have tried to ensure their liability driven investments remain sufficiently collateralised.

“It is expected that hundreds of schemes will have had their hedging reduced to some extent. This is likely to lead to some permanent changes to LDI funds and how liability risks are hedged in future," he continued.

"That said, we shouldn’t forget the huge improvement in funding position many schemes have seen. Quantifying that and considering how they react to that should be a key focus of attention for schemes.”

Mercer’s Pension Risk Survey revealed a similar picture, as although FTSE 350 DB pension schemes’ surplus had fallen as of the month end from £9bn to £5bn, this masked the "record highs" seen in the week prior, with surpluses increasing to more than £100bn before the Bank of England stepped in.

The tracker showed that liabilities for FTSE 350 DB pension schemes fell from £657bn to £605bn at the end of September as a result of the rising corporate bond yields, although this was partially offset by a fall in asset values, from £666bn in August to £610bn.

Mercer also pointed out that with gilt yields dominating headlines, inflation has gone somewhat unnoticed, despite a "significant rise" in future implied inflation expectations, which is currently at its highest level in a decade.

Mercer UK wealth trustee leader, Tess Page, commented: “The aggregate funding position on an accounting basis has been incredibly volatile during September, soaring to a surplus of over £100bn last week, before settling at a surplus £5bn at the end of September.

“There will be schemes that were forced sellers of assets, and funding positions will have been sorely tested.

“To add to trustees’ headaches, the current situation could potentially have implications on the covenant strength of some employers, and their ability to pay contributions, as higher interest rates will mean that borrowing becomes more expensive at a time where they are also facing rising costs and global supply chain issues.

“It is crucial for trustees and employers to take stock of where they are and consider what future scenarios may unfold, and what contingency plans are in place through their integrated risk management frameworks, to manage risk.”

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