Deficits of UK defined benefit (DB) pension schemes decreased by £56bn last month, signifying an almost 70% reduction, according to analysis by XPS Pension Group.
Rising gilt yields coupled with a fall in long-term inflation expectations were behind the improvement in funding levels over June, which add to a £250bn reduction in deficits seen since the start of the year.
Based on assets of £1,583bn and liabilities of £1,609bn, the analysis shows that the average funding level of DB pension schemes on a long-term target basis was 98% as of 29 June 2022.
Charlotte Jones, senior consultant at XPS Pensions Group, said: “The good news that schemes are hurtling towards their long-term targets should prompt trustees and companies to review the next steps for their schemes.
“With some schemes’ seeing vast improvements in their funding positions, we are seeing preparations for buyout, reviewing hedging and investment strategies, or even revisiting the deficit recovery payments making their way onto schemes’ agendas.
“They must also not forget about the scheme members in this high inflationary environment who are likely to need more support and education from their schemes.”
Buy-in and buyout market volumes are thought that have been between £10bn and £12bn in the first half of 2022, according to separate research by Hymans Robertson, which recently surveyed insurance companies offering pension scheme buy-ins.
The same insurers questioned expected that volumes would be close to £25bn in the second half of 2022. That would take the total for the whole of 2022 to around £35bn, a 25% increase on the 2021 volumes of £27.7bn, and the second-busiest year on record.
“The rapid growth in demand for pension schemes to insure their risks, along with improved pension scheme funding levels, attractive insurer pricing and new alternative risk transfer options, means that we expect a record-breaking year for buy-ins and buyouts in 2023,” said James Mullins, head of risk transfer at Hymans Robertson.
“This is likely to exceed the £44bn that we saw in 2019. We also expect around £50bn a year of buy-ins and buy-outs on average over the next 10 years, in addition to longevity swaps. That means by the end of 2031, £1trn of pension scheme liabilities will have been insured, covering five million members’ benefits.”
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Author: Chris Seekings
