The aggregate surplus of FTSE 350 companies’ defined benefit (DB) pension schemes increased by £17bn to £64bn at the end of January 2024, Mercer’s latest monthly analysis has revealed.

Marking a reversal of the funding level deterioration previously seen over December 2023, Mercer's tracker also revealed an increase in the aggregate funding level across company accounts since the end of December 2023.

According to the tracker, the present value of liabilities decreased from £629bn on 31 December 2023 to £597bn at the end of January 2024 driven by an increase in corporate bond yields.

Asset values, meanwhile, decreased from £676bn to £661bn at the end of January 2024.

Mercer highlighted these movements as demonstration of the impact of recent market volatility on pension schemes, suggesting that, with the demand for government debt expected to fall significantly, the increase in bond yields seen over January could continue.

Indeed, the group clarified that while the increases in bond yields seen in January were not as large or as fast as seen in the mini-Budget of September 2022, this could be the tip of the iceberg.

However, Mercer acknowledged that the UK’s Debt Management Office is aware of this problem and is expected to announce a reduction in the issuance of government bonds alongside the spring budget.

Mercer head of corporate investment consulting, Adam Lane, said: “Pension scheme funding positions are tied to the market and the volatility we’ve seen over the last few months really brings this into focus.

"Markets are pricing in falls in interest rates during 2024, but this should not be seen as the expected outcome.

“Our analysis suggests £300bn of pension assets could potentially be transferred to insurers in the coming years requiring significant sales of government bonds which, in the absence of any new buyers, is likely to put major upward pressure on yields and UK finances. It would seem volatility is here to stay for pension schemes.”

However, Lane noted that many schemes who have not passed their liabilities to an insurer have been making larger allocations to credit instruments and hedging funding positions against market movements.

"However, while many schemes will now be running lower levels of risk, residual risks will have become more pronounced as a result," he added.

"For example, we anticipate those who have increased allocations to credit-instruments will now be bearing a larger amount of credit risk. We expect that this may come into sharper focus through the remainder of 2024.”

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