On the go: UK defined benefit funding levels have remained flat quarter on quarter despite improvements since the onset of the Covid-19 pandemic, but sponsor health remains a top concern, Legal & General Investment Management reports.
According to the manager, the second quarter of 2021 marks the first quarter since the onset of the pandemic that the health of DB pension schemes has failed to improve, ending four consecutive quarters of growth.
LGIM’s health tracker, a monitor of the current health of UK DB pension schemes, found that the average DB scheme can expect to pay 98.2 per cent of accrued pension benefits as of June 30 2021, the same figure recorded on March 31 2021.
Having been at 96.5 per cent as of December 31 2019, the health of DB schemes dropped to 91.4 per cent as of March 31 2020 following the onset of the pandemic before steadily improving for four consecutive quarters between the beginning of April 2020 and end of March 2021.
This plateauing in the second quarter of 2021 suggests that the UK’s DB pension schemes may well have completed their initial recovery from the pandemic, LGIM said, while also noting that the findings may understate the negative impact of the pandemic
John Southall, head of solutions research at LGIM, warned that “sponsor health remains a key concern as we move forward” in light of the weakening of covenants that many schemes will have endured.
Commenting on the findings, he said: “Over the second quarter, growth assets continued to outperform but interest rate levels fell back somewhat. This partly reversed the very sharp rise seen in Q1 – the largest quarterly increase in nominal rates seen in years.”
He added: “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, such that overall it was flat over the quarter.”
Southall noted that LGIM had chosen to retain a typical sponsor rating assumption of BB in its calculations, but with the long-term impact of the pandemic still unclear, he said that if a rating of B was assumed then the expected performance of benefits met figure as at June 30 2021 would be around 1.2 per cent lower.
