Pension scheme surpluses start new year on a high despite liability increases

Pension scheme surpluses start new year on a high despite liability increases

08 Jan 2024

• XPS Pensions Group estimates that the aggregate surplus of UK pension schemes on long-term targets now stands at approximately £98bn.
• A fall in long-term gilt yields of ~0.5% led to an increase in the value of liabilities, reducing scheme funding levels.
• This rise was partially offset by aggregate scheme assets increasing over December 2023, driven by schemes’ hedging strategies and positive growth returns.

Across December 2023, UK pension schemes’ overall funding positions have fallen by c.£28bn against long-term funding targets. Despite this fall, and based on assets of £1,446bn and liabilities of £1,348bn, the aggregate funding level of UK pension schemes on a long-term target basis remains extremely positive and was 107% of the long-term value of liabilities, as of 31 December 2023.

Danny Vassiliades, Partner at XPS Pensions Group said: “Despite falls in funding levels last month, aggregate DB pension scheme funding levels are still at an extremely positive level as we begin 2024. Significant falls in long-term gilt yields over December following better-than-expected inflation figures and expectations among many of earlier interest rate cuts are a stark reminder that funding can change quickly as aggregate liabilities increased by c.£80bn over the month.

The speed of these changes indicates that schemes should continually reassess the appropriateness of their investment strategies, with a particular focus on ensuring they are suitably protected against any potential fall in gilt yields. This is particularly important for schemes looking to protect their current strong funding levels, including those in which buyout is a realistic short-to-medium-term objective.”

Notes:

XPS DB:UK tracks the funding position of UK defined benefit (DB) pension schemes on a long-term target basis and allows real-time monitoring of changes and analysis of the reasons behind any movement.

XPS DB:UK Funding Watch monitors the combined deficit and funding level of UK defined benefit (DB) pension schemes (i.e. all registrable schemes - including hybrids) on a long-term target basis using a discount rate of Gilts + 0.5%. It combines XPS’s market leading Member Analytics and the award-winning journey planning tool, Radar, enabling real time monitoring of changes and analysis of the reasons behind any movement.

An online version of XPS DB:UK is available here:https://www.xpsgroup.com/services/xps-pensions/xps-dbuk-funding-watch/