XPS said UK pension schemes had taken a major step towards improved health thanks to rising gilt yields.

The improvement came after several shocks to UK pension schemes from the Russian invasion of Ukraine in February and the gilt meltdown in October.

XPS Pensions estimated that the aggregate funding level of UK pension schemes improved “drastically” by around £400bn during over 2022, equivalent to around 20% on a long-term target basis.

Last year saw gilt yields rise by about 3% resulting in a 35% reduction in the value of pension scheme liabilities. Because of this many UK pension schemes moved into a surplus position for the first time since aggregated records began. This resulted in more schemes considering buyouts, XPS said.

Pension schemes are seeing surpluses despite typical asset portfolios falling by 20% in 2022 due to stock market declines.

The UK liability-driven investment (LDI) market saw upheaval in September and October as collateral calls caused huge liquidity pressures on pension schemes. XPS said this has resulted in LDI managers bringing in tighter controls.

UK pension schemes’ funding positions improved by a “huge margin” of £400bn over the year to 20 December 2022 against long-term funding targets. Based on assets of £1,456bn and liabilities of £1,394bn, the aggregate funding level of UK pension schemes on a long-term target basis was 104% as of 20 December 2022. This represents an increase of just under 20% during 2022, XPS said.

Soaring inflation has hit some schemes with some pensioners’ income falling behind the rising cost of living. Despite this, XPS said that in general schemes were relatively protected as long-term inflation levels, while fluctuating during the year, ended the year only slightly higher than they started and therefore have “not significantly impacted funding levels.”

Tom Birkin, actuary at XPS Pensions Group, said: “From February’s shock Russian invasion of Ukraine to the gilt market meltdown in October, 2022 has been a year of seismic market movements – and the upshot for pension schemes is that most find themselves in a much healthier position than they were at the start of the year.

“With more schemes in surplus and insurer premiums now looking more affordable than ever, lots of schemes will be contemplating buyout to lock-in the huge gains they have achieved during 2022. On the supply side, the UK bulk annuity market appears to be gearing up for a record year with unprecedented demand from pension schemes seeking to secure the long-term future for their members.”