Defined benefit (DB) schemes can now expect to pay 98.2% of accrued benefits up from 91.4% at the end of March last year, research from Legal & General Investment Management (LGIM) shows.
The investment manager's health tracker - a monitor of the current health of UK DB pension schemes - said that, while the health of DB scheme had failed to improve over the three months to 30 June 2021, they had seen four consecutive quarters of growth prior to that and noted that funding levels remain far stronger than their pre-Covid levels.
It said the health of DB schemes had originally dropped as low as 91.4% as of 31 March 2020, following the onset of the pandemic, having previously been at 96.5% as of 31 December 2019.
LGIM said this data suggested that DB schemes may have "completed their initial recovery from the pandemic" - but 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 explained: "Over Q2, growth assets continued to outperform but interest rate levels fall back somewhat. This partly reversed the very sharp rise seen in Q1 - the largest quarterly increase in nominal rates seen in years. However, interest rates remain substantially higher than at the end of 2020.
"Other factors including relatively high experienced inflation and some technical revisions to our assumptions also led to some modest losses in expected performance of benefits met (EPBM), such that overall, it was flat over the quarter.
He continued: "Sponsor health remains a key concern as we move forward. As for the previous quarter, we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects covenant strength, impacting the security of benefits and our EPBM measure. The long-term impact of the pandemic remains unclear, however, we noted that if a rating of B was assumed, the EPBM figure on 30 June 2021 would be around 1.2% lower."
LGIM head of rates and inflation strategy Christopher Jeffery added: "Global bond markets recovered some of their poise in the second quarter despite unexpectedly high inflation prints across Western economics. Investors are buying into the narrative from central banks that price pressures will be transitory rather than permanent. In turn, that has allowed equity investors to shrug off concerns about the spreading delta variant and focus instead on the continued strength in the profit recovery. With earnings growth so strong, we think the positive tailwind to risky assets is set to persist."