UK defined benefit (DB) pension schemes’ deficits improved by 2.1 per cent in Q2 2020 after a rebound in growth assets, according to Legal & General Investment Management (LGIM).

LGIM's health tracker, which seeks to monitor of the current condition of the nation’s DB schemes, found that the average DB scheme could expect to pay 93.5 per cent of accrued pension benefits as at 30 June 2020, up from 91.4 per cent at the end of the first quarter.

However, this remains below the 96.5 per cent figure recorded at the end of December 2019.

LGIM stated that the most significant market movements behind the improvement included a rebound in growth assets following aggressive stimulus from policy makers and a general improvement in investor sentiment.

The company added that nominal interest rates continued to fall and inflation expectations grew, with these two factors offsetting some of the gains due to schemes under-hedging their rates and inflation risk.

LGIM head of solutions research, John Southall, said: “It’s great to see things improving once more – yet these higher ratios may understate the negative impact of Covid-19 since the start of the year, due to a weakening of covenant that many schemes will have endured but that is challenging to currently estimate.

Southall stated that a weakened covenant could promote de-risking or “effectively shift the medium-term target away from low dependency and towards a more onerous buyout objective”, adding that “this could promote to a higher allocation to growth assets to help close the wider gap”.

LGIM head of rates and inflation strategy, Christopher Jeffery, commented: “Investors in risk assets have been on a rollercoaster ride in the first half of the year. In sterling terms, the value of global equities fell by around a fifth in the first quarter before recovering all of that in the second quarter.

“The events of 2020 serve as a good reminder that investors of all stripes need to be clear about their risk tolerance: that applies to the largest DB pension schemes just as much as to the smallest retail investors.

"Those investing beyond their true risk tolerance are likely to suffer from ‘path dependence’ given pressure to reduce exposure when markets are at their most volatile.”

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