On the go: The health of UK defined benefit pension schemes edged upwards to a record high at the end of last year, according to Legal & General Investment Management.
The average DB scheme can expect to fund 98.4 per cent of accrued pension benefits as of December 31 2021. This is up from 98.3 per cent at the close of September last year.
DB schemes have been gradually recovering from the depths of March 2020, when the havoc in financial markets caused by the coronavirus pandemic drove LGIM’s indicator to as low as 91.4 per cent.
A strong performance from growth assets in the final quarter of 2021 helped to push LGIM’s measure of scheme health upwards, which “also benefited from a modest drop in inflation expectations”, according to John Southall, head of solutions research at LGIM.
Rising inflation nevertheless prompted the Bank of England’s Monetary Policy Committee to lift interest rates to 0.5 per cent from 0.25 per cent, as widely expected, on the same day LGIM’s research was released.
The central bank expects inflation to rise to around 7 per cent in the spring before falling back, which necessitated a rate rise as the BoE bids to bring inflation down to its 2 per cent target. In December, it predicted that inflation would peak at around 6 per cent in the spring.
Institutional investors have been gearing up for increases to interest rates in the face of spiralling inflation. Interest rate liability and inflation-hedging activity surged in the last quarter of 2021, according to BMO Global Asset Management data released earlier in February.
Interest rate hedging grew to £46.5bn, an increase of 27 per cent, while inflation hedging rose by 24 per cent, to £24bn. BMO said that hedging activity was concentrated in October and November.
