The health of the UK’s Defined Benefit (DB) pension schemes continues to improve, with these schemes now more financially robust than they were pre-Covid.
Legal & General Investment Management DB Health Tracker shows the average1 DB scheme can expect to pay 98.2 per cent of accrued pension benefits as of 31 March 2021, up 6.8 per cent from 31 March 2020.
The health of the UK’s DB pension schemes has also shown a 1.1 per cent improvement quarter on quarter against the funding level of 97.1 per cent at 31 December 2020.
This latest improvement means LGIM’s measure has shown a continuing improvement in each of the last four quarters.
However, it is important to note that these figures may yet still understate the negative impact of the pandemic, due to a weakening of covenants that many schemes will have endured.
LGIM head of solutions research John Southall says the improvement in the health of DB schemes was “largely driven by a rapid rise in nominal interest rates, the sharpest three month increase seen in years, benefitting schemes that haven’t fully hedged their interest rate risk.”
He adds: “These benefits were partially offset by a rise in expected inflation (increasing inflation-linked liabilities) but growth assets also posted a strong quarter, boosting asset values.”
Southall adds: “From a covenant perspective we chose to retain a typical sponsor rating assumption of BB in our calculations as confidence in the recovery improves.
“Whilst the long-term impact of the pandemic remains unclear, fiscal and monetary actions have been extremely supportive. We noted that if a rating of B was assumed, the EPBM figure at 31 March 2021 would be around 1.1 per cent lower.”
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