'Stars align' to boost health of UK schemes to more than pre-Covid levels

Jonathan Stapleton
clock • 2 min read

The health of the UK’s defined benefit (DB) pension schemes has surpassed that of their pre-Covid levels as they continued to recover through final quarter of 2020, Legal & General Investment Management (LGIM) research reveals.

LGIM's health tracker - a monitor of the current funding situation of UK DB pension schemes - found the average DB scheme could expect to pay 97.1% of accrued pension benefits as of 31 December 2020, up 1.6 percentage points from 30 September 2020.

This compares to the pre-Covid level of 96.5% from 31 December 2019 as well as the lows of 31 March 2020 which saw the EPBM (expected proportion of benefits met) metric drop to 91.4%.

This latest improvement means LGIM's measure was up on 2020 (from 96.5% to 97.1%) despite falling to 91.4% at the end of March and marks a third successive quarter of growth across 2020. Nominal rates were around 0.6% lower at the end of 2020 than at the start, but the impact from this was outweighed by the overall performance of growth assets over the year.

However, LGIM said it was important to note that these figures may yet still understate the negative impact of the pandemic, due to a weakening of covenants that many schemes will have endured.

Head of solutions research John Southall said: "The last quarter of 2020 was another positive period for our measure of UK DB scheme health, with the ratio continuing to rise, as it has consistently done so since the March lows of 91.4%. This change was almost entirely driven by outperformance of growth assets with interest rates and expected inflation broadly flat over the quarter.

"That said, we would caution optimism, as the extent of covenant deterioration remains unclear with a large variation in impact across sponsors. Our calculations are based on a typical BB sponsor rating. If this were to fall to B, for example, we would anticipate an EBPM value around 2% lower."

LGIM head of rates and inflation strategy Christopher Jeffery added: "Stars aligned for the resolution of several key market uncertainties in the fourth quarter of last year. Risk assets welcomed a new US president, a UK-EU free trade agreement and the first licensed vaccines against Covid.

"This combination of events saw a significant upgrade to 2021 global growth forecasts and an associated powerful rally in risk assets. Outside of the UK, the better global growth outlook combined with expectations of fiscal stimulus under a new democratic administration drove yields and inflation expectations higher.

"The outlook for markets in the year ahead is likely to be principally determined by the success or failure of vaccine roll-out in the major economies. It is early days on that front, but the initial prognosis, particularly in the UK and US, is positive."

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