Pension scheme surpluses have started the new year on a high despite increases in their liabilities, according to estimates from XPS Pensions Group.

Its analysis suggests that the aggregate surplus of UK pension schemes on long-term targets now stands at approximately £98bn.

A fall in long-term gilt yields of 0.5% led to the increase in the value of liabilities, reducing scheme funding levels. But the rise was partially offset by aggregate scheme assets increasing during December, driven by schemes’ hedging strategies and positive growth returns, XPS said.

In December UK pension schemes’ overall funding positions fell by around £28bn against long-term funding targets.

Despite the fall, and based on assets of £1,446bn and liabilities of £1,348bn, the aggregate funding level of UK pension schemes on a long-term target basis remained extremely positive and was 107% of the long-term value of liabilities as at 31 December 2023.

Danny Vassiliades, partner at XPS Pensions Group said: “Significant falls in long-term gilts yields over December following better-than-expected inflation figures and expectations among many of earlier interest rate cuts, are a stark reminder that funding can change quickly as aggregate liabilities increased by around £80bn over the month.”

He said the speed of the changes indicated that schemes should continually reassess the appropriateness of their investment strategies, with a particular focus on ensuring they are suitably protected against any potential fall in gilt yields.

Mr Vassiliades added: “This is particularly important for schemes looking to protect their current strong funding levels, including those in which buyout is a realistic short-to-medium-term objective.”