DB pension surpluses remain positive as Bank of England cuts interest rates, XPS analysis finds
DB pension surpluses remain positive as Bank of England cuts interest rates, XPS analysis finds
01 Aug 2024
- XPS Group estimates that the aggregate surplus of UK pension schemes on long-term targets remains extremely positive at approximately £186bn, slightly down on £194bn the previous month.
- A fall in long-term gilt yields of c.0.1% led to an increase in the value of liabilities, decreasing scheme funding levels.
- However, this fall was largely offset by aggregate scheme assets increasing over the month, driven by schemes’ hedging strategies.
Over July 2024, UK pension schemes’ funding positions decreased by c.£8bn, relative to long-term funding targets according to new research from XPS Group. With assets totalling £1,469bn and liabilities of £1,283bn, the aggregate funding level of UK pension schemes on a long-term target basis remains extremely positive, at 114% of the long-term value of liabilities, as of 30 July 2024.
Today also marks an eagerly anticipated interest rate cut by the Bank of England, highlighting the increased confidence the Bank has that inflation is back under control. This will come as good news to pensioners who have suffered substantial losses in the real value of their pension income as a result of the spike in inflation observed post-Covid, where their benefits have fixed increases or are inflation-linked but with a cap.
Henry Shore, Senior Consultant at XPS Group said: “The extremely positive funding levels currently being experienced by many DB pension schemes comes as the Bank of England’s Monetary Policy Committee has today cut the bank base rate for the first time since the start of the Covid-19 pandemic in March 2020.
At that time, interest rates were cut to just 0.1%, compared with 5% today, and DB pension schemes faced combined estimated long-term target deficits in excess of £300bn. Whilst the significant improvements in funding levels have been great news for members, trustees and sponsors alike, it also highlights how quickly circumstances can change due to unexpected market movements.
With The Pensions Regulator’s new DB funding code finally being laid in parliament on Monday 29th July, now is an opportune moment for trustees and sponsors of pension schemes to assess their long-term planning and risk management strategies as they look to protect their positive funding positions and reach their long-term targets.”