The deficit of UK defined benefit (DB) pension schemes against long-term funding targets fell by around £21bn from £328bn to £307bn in January, according to XPS’s DB:UK funding tracker.

It revealed that growth assets for DB schemes fell by £56bn over the month due to interest rate levels and inflation hedging in place.

Despite the fall in assets, the UK pension scheme deficit declined as it was offset by a fall in liabilities, which was attributed to rises in gilt yields, partially offset by inflation.

As a result, January ended with assets of £1,815bn and liabilities of £2,122bn, and XPS estimated that the average pension scheme would need an additional £30,000 per member to ensure it can pay their pensions into the long term.

XPS predicted that it will currently take nearly 13 years to reach long-term targets under The Pensions Regulator’s proposed new DB funding code rules, compared to the eight years predicted at the beginning of 2021, primarily due to lower anticipated investment returns.

The firm indicated that this fall in assets may continue, pointing to the indication by the US Federal Reserve chair, Jay Powell, that the Fed is planning to raise interest rates at its next meeting.

XPS also mentioned the potential conflict between Russia and Ukraine and pointed to the FTSE 100 falling by around 2.6 per cent on 24 January as tensions escalated.

The consultancy noted that European markets are expected to suffer the most financially from any potential conflict and this could impact heavily on pensions schemes.

XPS’s senior consultant, Charlotte Jones, commented: “After a turbulent yea, it’s one step forward and five steps back as a lot of schemes are finding themselves back where they started in early 2021 and their end-game is even further out of reach.

“Whilst frustrating, trustees and sponsors must continue to work together to reach their goals, there are many ways they can get back on track whether it’s by exploring the options available to members, reviewing their investment strategies or simply by injecting more cash.”

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