Pension scheme surpluses rise on the back of sharp gilt yield rises

by | Jun 6, 2023

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Across May 2023, UK pension schemes’ funding positions have improved by c.£40bn against long-term funding targets. Based on assets of £1,393bn and liabilities of £1,283bn, the aggregate funding level of UK pension schemes on a long-term target basis was 109% as of 30 May 2023.

Felix Currell, Senior Consultant at XPS Pension Group said: “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 LDI managers starting to call for additional capital to support their leveraged pooled funds. However, 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.

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.”  

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