Defined benefit (DB) schemes have shown strong asset performance following the dissipation of hard Brexit fears and a fall in global recession risks, Legal and General Investment Management (LGIM) has said.

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 96.5 per cent of accrued pension benefits as at 31 December 2019, up from 93.7 per cent in September 2019.

The 2.8 per cent increase was attributed to an increase in interest rates alongside positive asset performance during Q4 2019, with the period seeing the biggest three month increase in 30-year index linked gilt yields for the last decade.

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 just 3.5 per cent of accrued pension benefits would not be paid on average across their scenarios, compared to 6.3 per cent in September of last year.

LGIM emphasised that how manageable a pension scheme’s deficit is depends on a number of factors, 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: “When global recession risks receded over Q4 2019, Gilt yields rose more than US and German government bonds as hard Brexit fears dissipated.

In 2019, we saw structural downward pressure on long-dated UK inflation when comparing it to the US equivalent. In Q4, this contributed to 30-year index-linked gilt yields rising approximately 0.4 per cent, one of the biggest three-month increases in the last decade.

“GBP strength from October onwards detracted from growth assets exposed to overseas currencies and, in turn, will have hurt marginal demand to de-risk, as fewer schemes reach the position to do so. The impact on Sterling would have cancelled out most of the Q4 gain on global equities for an unhedged UK investor.

“With Brexit risks now perceived as more balanced, a key question for DB schemes is whether to retain the overseas currency exposure that hurt their funding levels in Q4 but cushioned the blow back at the time of the 2016 Brexit referendum.

"Generally, in the risk management of our own multi-asset portfolios, we retain significant overseas currency exposure, in part to help benefit our investors in scenarios where the UK suffers a negative shock and their job security or sponsor security might fall".

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