The aggregate UK defined benefit (DB) pension surplus increased by around £35bn to £53bn as at the end of April 2023, partially reversing the declines seen in March, analysis from XPS Pensions Group has revealed.

The XPS DB:UK Tracker showed that a rise in long-term gilt yields led to a decrease in the value of liabilities to £1,389bn, improving scheme funding positions, while aggregate scheme assets fell over the month to £1,442bn, driven by schemes' hedged investment strategies.

This meant that the aggregate funding level of UK pension schemes on a long-term target basis was 104 per cent as of 28 April 2023.

The funding improvement marked a partial reversal of the funding decline seen in March, when the aggregate surpluses of DB schemes more than halved £25bn, after a fall in long-term gilt yields led to an increase in the value of liabilities.

Looking ahead, XPS Pensions suggested that, as schemes’ funding levels improve, many are looking to pursue risk settlement options and are selling illiquid private market assets to put them in the best possible position to do so.

However, it pointed out that highly hedged schemes are also selling their illiquid allocations to ensure they have sufficient liquidity to support their hedging portfolios, given the recent strain within the liability-driven investment (LDI) market, revealing that this has prompted a situation in which some private assets are trading at discounts of up to 20 per cent.

XPS Pensions Group senior consultant, Felix Currell, stated: “The discounts we’re currently seeing in the market for private assets presents opportunities for schemes that can tolerate some illiquidity.

“However, not all private markets assets represent good value and trustees must tread carefully and consider any allocation in the wider context of their scheme.”

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