Market inflation risks setting back pension schemes’ progress in achieving their long-term funding targets by as much as 10 years, according to XPS Pensions Group.
Since March 2020, gilt yields and long-term inflation expectations have risen by 1.1%, reducing the liabilities for most pension schemes. The strong recovery of markets over the past two years have meant that UK deficits have recovered by £195 billion. However, long-term inflation expectations and lower projected returns have set schemes back, says XPS.
In December 2019, XPS projected that deficits of pension schemes would reduce by £100 billion over the period to March 2022 as employers paid in contributions and scheme assets delivered investment returns. But deficits are £50 billion higher than they were in December 2019, meaning that schemes are £150 billion worse off than projected.
If employers continue their contributions this would reduce the term by 6 years, with schemes projected to reach their long-term targets in 2029, however, it will cost sponsoring employers over £75 billion.
Charlotte Jones, senior consultant at XPS, said: “Whilst it might be comforting to many schemes that their deficits haven’t increased markedly after a difficult two years, it’s easy to forget that the pandemic has taken its toll on their long-term funding journey.
“With high inflation and market uncertainty set to continue, trustees need to be carefully monitoring their funding position and investment strategy to ensure their long-term plan remains on track.”
