Legal & General Investment Management’s (LGIM) DB health tracker, a monitor of the current health of UK DB pension schemes, found that the average DB scheme saw a rise of 0.1 percentage points from Q3 2021.
The health of the UK’s DB pension schemes has been gradually improving since March 2020, when it had dropped as low as 91.4%, LGIM noted.
LGIM head of solutions research John Southall said: “The final quarter of 2021 saw a continued strong performance from growth assets which helped our measure of UK scheme health edge to its strongest recorded position yet.
“Scheme health also benefitted from a modest drop in inflation expectations, falling back from the elevated levels we saw in Q3 (the highest levels since 2008). However, this was offset by a slight decrease in long-term interest rates. Overall, our expected proportion of benefits met (EPBM) measure managed to post a small gain and reach a new high.
“The fact that the measure means it is impossible for schemes to be more than 100% healthy makes large increases in EPBM challenging. However, it is encouraging to see the security of members benefits continue to improve.
“As for previous quarters, we chose to retain a typical sponsor rating assumption of ‘BB’ in our calculations. This assumption reflects current covenant strength. However, the long-term impact of the pandemic on DB schemes’ health remains unclear. It is worth noting that if a ‘B’ rating was assumed instead, the EPBM figure would be around 1.1% lower,” he said.
The analysis was based on the Purple Book from the Pension Protection Fund’s (PPF). It assumes that a typical DB scheme holds approximately 20% in equities, 70% in bonds/liability-driven investment, 5% in property and 5% in other assets.
LGIM also assumed rates and inflation hedge ratios of 70% of liabilities on a gilts basis and no future accrual or deficit contributions.
See more: PPF Purple Book 2021 – Bond allocation nears three-quarters of DB assets
Tom Higgins is a junior financial journalist at Rhotic Media
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