XPS Pensions Group has warned that although UK pension schemes’ financial positions have improved substantially since the first lockdown in March 2020, long-term deficits are still £150 billion higher than what XPS would have expected in the absence of the pandemic.

“This could set back schemes’ progress in achieving their long-term funding targets by as much as 10 years,” said XPS.

“If employers maintain their contributions this would reduce the term by six years, with schemes projected to reach their long-term targets in 2029.

“But this will cost sponsoring employers over £75 billion.”

XPS said that since the first lockdown was announced in March 2020, gilt yields and long-term inflation expectations have risen by 1.1%, reducing the value of the liabilities for most pension schemes.

The recovery of markets over the two years since have meant that UK pension scheme deficits have recovered by £195 billion, XPS said.

Based on assets of £1.742 trillion and liabilities of £2.034 trillion, the average funding level of UK pension schemes on a long-term target basis was 86% as of mid-March 2022.

However, XPS said recent rises in long-term inflation expectations and lower projected investment returns have set back schemes’ progress in achieving their long-term funding targets by as much as 10 years.

“In December 2019, XPS Pensions Group projected that deficits of pension schemes would reduce by £100bn over the period to March 2022 as employers paid in contributions and scheme assets delivered investment returns,” said XPS.

“However, deficits are in fact £50bn higher than they were in December 2019, meaning that schemes are £150bn worse off than projected.

“These projections assume that employers put money into the schemes until the end of existing agreed recovery plans.

“Employers maintaining contributions for longer could help to reduce the term by six years, with the average scheme expected to reach their long-term targets in 2029.

“However, pursuing this strategy would cost sponsoring employers nearly £75bn.”

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.”