UK pension schemes' funding level improves to 103% in October-XPS

Commuters walk across London Bridge toward the financial district, in London

LONDON (Reuters) -UK defined benefit pension schemes' aggregate funding level rose by 1% to 103% in October, pensions consultants XPS said on Wednesday.

Pension schemes faced a short-term cash crunch in late September on derivatives positions, forcing the Bank of England to step in to stabilise the UK government bond, or gilt, market.

But a sharp rise in gilt yields has improved schemes' long-term funding positions. Rising rates mean pension schemes need to hold less money now to pay future pensions.

"Whilst a small minority of schemes will have been forced into choosing between maintaining hedging levels and targeting investment returns...the improvements in funding positions...have left many schemes in a fantastic position to achieve their long-term objectives,” said Felix Currell, senior investment consultant at XPS.

Many companies are keen to offload the risks of defined benefit, or final salary, pension schemes from their balance sheets through an insurance buy-out, particularly when times are tough.

But the schemes need to be well-funded - often with a cash injection from their sponsoring employer - to afford the insurance premium.

UK-listed companies with a defined benefit pension scheme issued 18 profit warnings in the third quarter, up 38% from a year ago, with the majority citing rising costs and overheads as the main reason for the warnings, data from consultants EY showed on Wednesday.

Of a total 1,217 UK-registered listed companies, 258 sponsor a UK defined benefit pension scheme, EY said.

(Reporting by Carolyn Cohn'Editing by Alison Williams and Kim Coghill)