The aggregate surplus of UK defined benefit (DB) pension schemes rose to £110m over May, after a significant rise in long-term gilt yields of 0.5% led to a decrease in the value of liabilities, analysis from XPS Pensions Group has revealed.

Figures showed that across May, UK pension schemes’ funding positions improved by around £40bn against long-term funding targets, based on assets of £1,393bn and liabilities of £1,283bn.

The aggregate funding level of UK DB pension schemes on a long-term target basis also improved, rising from 104% in April to 109% as of 30 May.

XPS Pensions Group senior consultant, Felix Currell, stated: “Long-term gilt yields have continued to rise across May, particularly following the latest UK inflation figures and the market’s swift reaction to them.

“This has led to most liability-driven investment (LDI) managers starting to call for additional capital to support their leveraged pooled funds.”

However, Currell clarified that reduced leverage and greater operational robustness following regulatory guidance means there is a clear distinction between these capital calls and the panic observed during the 2022 gilts crisis.

“So far, we have seen manageable calls and a smoother process being followed by the managers than last autumn,” he continued.

“Of course, whilst long-term yields have started to approach levels seen during the crisis, they still remain below the peaks of the crisis and crucially the rise has not been as rapid.

“Whilst we would have expected LDI managers to hold up better under the current environment, it’s comforting to witness a smoother approach play out in practice.

“This will continue to be put to the test as gilt yields are generally expected to remain volatile whilst uncertainty around inflation persists, and schemes heavily invested in illiquid assets may again need to start thinking about the role of these assets alongside their hedging strategy.”


This article first appeared on ours sister title, Pensions Age.

Share Story: