17 Nov 2021 2 min read

DB schemes: healthiest since COVID – but pandemic may cast long shadow

By Yikai Shen , John Southall

The UK’s defined benefit (DB) pension schemes finished the third quarter at their healthiest levels since before the onset of COVID-19, according to our latest research.



Our DB Health Tracker, a monitor of the current health of UK DB pension schemes, suggests that the average[1] DB scheme can expect to fund 98.3% of accrued pension benefits as of 30 September 2021.

This is an increase of 0.1 percentage points from the figure of 98.2% recorded three months before on 30 June 2021.

The health of the UK’s DB pension schemes has been gradually improving since March 2020, when it had dropped as low as 91.4% as a result of the immediate impact of the pandemic on financial markets.

However, while these figures suggest that the health of UK DB schemes has been improving since the initial spread of COVID-19, it is important to note that these figures may yet still understate the negative impact of the pandemic, due to weakening covenants from pension scheme sponsors, which many schemes have endured.

As for previous quarters, in this analysis we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects current covenant strengths. The long-term impact of the virus and lockdowns on DB schemes’ health nevertheless remains unclear. It is worth noting that if a B rating was assumed instead, the Expected Proportion of Benefits Met (EPBM) figure would be around 1.2% lower.

Inflation’s impact

It’s also worth highlighting that inflation expectations rose to their highest levels since 2008 in the third quarter, with the bond markets implying a substantial risk that the rise in inflation may be more than transitory.

This has made it more challenging for DB schemes to meet their unhedged inflation-linked liabilities. However, a relatively modest (but still substantial) rise in nominal interest rates, combined with respectable growth asset performance, meant that overall our EPBM measure still managed to post a small gain.

We will continue to monitor DB schemes’ health and share our findings with you.


[1] Based on the Purple Book from the Pension Protection Fund, a typical pension scheme holds approximately 20% in equities, 70% in bonds/LDI, 5% in property and 5% in other assets. For illustration, we assume rates and inflation hedge ratios of 70% of liabilities on a gilts basis and no future accrual or deficit contributions.

Yikai Shen

Quantitative Associate

Yikai works as a quantitative associate in LGIM's Solutions group. Yikai assists in financial modelling and investment strategy development work. Yikai joined LGIM in August 2020 from Duff & Phelps, where he was an associate within the complex asset solution team and assisted in the valuation of credit derivatives. He obtained a master's degree in Maths and Finance from Imperial College London.

Yikai Shen

John Southall

Head of Solutions Research

John works on financial modelling, investment strategy development and thought leadership. He also gets involved in bespoke strategy work. John used to work as a pensions consultant before joining LGIM in 2011. He has a PhD in dynamical systems and is a qualified actuary.

John Southall