UK pension schemes’ funding positions improved by £400 billion over the year to December 20, 2022, equating to around 20% on a long-term target basis, according to a report from consultancy XPS Pensions Group.

The report said 2022 saw gilt yields rise by about 3% resulting in a 35% reduction in the value of pension scheme liabilities.

As a result, many UK pension schemes moved into a surplus position for the first time since aggregated records began, leading more schemes to consider buyouts.

Based on assets of £1.456 trillion and liabilities of £1.394 trillion, the aggregate funding level of UK pension schemes on a long-term target basis was 104% as of December 20, the report said.

“Following a year of significant volatility, long-term gilt yields ended the year c.3% higher than they were at the start,” said XPS.

“Inflation also proved a source of considerable impact for some schemes. The sharp rise in observed inflation combined with caps applying to benefits meant some pensioners income began to fall behind the rising cost of living.

“But 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.”