UK DB pension deficit falls by £ 72bn; Concerns about inflation persist

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The combined deficit of UK defined benefit pension schemes (DB) versus long-term funding targets fell by around £ 72bn to £ 309bn in December 2021, according to XPS Pensions’s DB: UK Funding Tracker.

Assuming assets of around £ 1,895 billion and liabilities of £ 2,205 billion, the tracker found that the average funding ratio for DB pension schemes on a long-term target basis had increased from 83% to 86% as of December 31 in November.

Last month’s changes were attributed to a surge in gilt yields after the Bank of England announced it would raise policy rates from an all-time low of 0.10 percent to 0.25 percent on December 16.

The update was highlighted as a “welcome improvement” on the deficit increase in November, when the combined deficit of the UK DB pension systems peaked at £ 400 billion amid political uncertainty, high inflation expectations and the advent of the Omicron variant.

XPS Pensions Group’s actuarial advisor Tom Birkin described the resulting surge in gilt yields as a result of the decision to raise interest rates as “a welcome message to pensioners after a difficult November”.

However, Birkin cautioned that given the ongoing uncertainty about inflation and Omicron, sponsors and trustees should be prepared for further volatility in 2022.

In addition, Felix Currell, senior investment consultant at XPS, said that the significant movements in interest rates and inflation have underscored the precision of the hedging strategies over the past year.

“This could have created some misalignment, and we encourage trustees to review their current hedge exposure to make sure it is in line with their goal,” he continued.

In fact, XPS estimates that the average retirement system would need an additional £ 29,000 in funding per member by the end of 2021 to ensure it can pay its pensions over the long term.

However, it made it clear that while this might affect members, pension systems were working hard to reduce deficits, and also pointed out that the recent surge in inflation means members whose pensions rise with inflation will do better than most will be able to meet the projected higher cost of living in 2022.

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