The value of aggregate funding liabilities for UK defined benefit pension schemes has increased by £55bn over the past eight weeks, analysis from Buck has revealed.

Its research has shown that the sudden rise was been driven by recent falls in gilt yields of more than 25 basis points during the same period, dropping to the lowest level in two years.

Gilt yields are often used by schemes to value current and future scheme liabilities, and Buck highlighted that a fall in yields was the most likely factor in UK DB pension scheme liabilities increasing to around £1.9trn.

Buck head of retirement consulting, Vishal Makkar, said that the recent volatility will “result in calls from some quarters for the pensions industry to re-evaluate validity of the long-used ‘gilts plus margin’ approach".

“It will be interesting to see how this issue is addressed in the regulator’s new funding code expected towards the end of this year,” he added.

Buck has suggested that schemes without a robust hedging strategy in place are more likely to be facing weaker funding positions, as the drop in yields has occurred at the same time as many trustees are facing increased liabilities due to GMP equalisation and Brexit uncertainty.

Furthermore, it said that schemes with contingent funding arrangements may need to determine if those arrangement has been triggered, while for others it may highlight the need for a strong integrated risk management framework.

Makkar concluded: “Of course, the best course of action will depend on each scheme’s unique funding position and investment strategy.

“Those schemes that have hedged their liabilities would have seen their assets increase to offset the impact of increasing liabilities.

“In other cases, trustees should be considering whether to implement their contingency plans as per The Pensions Regulator’s guidance.

“Where the sponsor covenant is particularly weak and the scheme has a high value at risk, trustees may even need to consider bringing forward their next actuarial valuation.”

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