The health of the UK’s Defined Benefit (DB) pension schemes has almost returned to their pre-COVID levels as they continued to recover through Q3 2020, according to Legal & General Investment Management (LGIM)
16 Nov 2020
LGIM's Health Tracker, a monitor of the current health of UK DB pension schemes, found that the average1 DB scheme can expect to pay 95.5% of accrued pension benefits as of 30 September 2020, up 2% from 30 June 20202.
This compares to the pre-COVID level of 96.5% from 31 December 20193 as well as the lows of 31 March 20204 which saw funding levels drop to 91.4%.
The latest quarterly analysis, which takes into account the risk that a sponsor might default and the impact that would have on scheme members, means that 4.5% of accrued pension benefits would not be paid on average across their scenarios in Q3 2020, compared to 6.5% in June 2020.
The most significant market movements behind the improvement include strong performance of growth assets and a rise in nominal interest rates, whereas inflation expectations remained broadly the same.
John Southall, Head of Solutions Research at LGIM: "It’s great to see things improving once again this quarter. As previously, however, we would caveat that these higher ratios may understate the negative impact of COVID since the start of the year, due to a weakening of covenants that many schemes will have endured. The extent of covenant deterioration is not yet clear. Our calculations are based on a typical sponsor rating of around BB. If this were to fall to B, for example, we would anticipate an Expected Proportion of Benefits Met (EPBM) value around 2% lower, wiping out the gain seen this quarter."
Christopher Jeffery, Head of Rates and Inflation Strategy at LGIM: "Since March, global risk assets and nominal yields have been driven higher by anticipation of an economic recovery as the world learns to cope with COVID. In recent weeks, those trends have been given an additional fillip by the US election and news of a breakthrough in the search for a vaccine. As a consequence, the gilt market has downgraded the likelihood of negative interest rates from the Bank of England in 2021 and beyond. RPI reform is now around the corner, with an announcement pending in late November, which constitutes the next major event risk for DB schemes to navigate."
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.2 trillion in total assets under management* of which a third is international. We also provide powerful asset origination capabilities. Together, these underpin our leading retirement and protection solutions: we are a leading international player in pension risk transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Through inclusive capitalism, we aim to build a better society by investing in long-term assets that benefit everyone.
*at 31 Dec 2022
Legal & General Investment Management
Legal & General Investment Management is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.29 trillion1. We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
For more than 50 years, we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property, and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
1Globally, we manage assets of £1.42 trillion or CHF 1.75 trillion as at 31 December 2021 (source: LGIM internal data as at 31 December 2021). The data combines assets under management by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong. Assets under management include securities and derivatives positions.
*at 11 Jan 2023
Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security. Views expressed are of LGIM as at 3 January 2023.
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