The funding position of the FTSE 350 defined benefit (DB) pension funds continued to improve following an increase in bond yields in April, according to Mercer’s latest Pensions Risk Survey data, with discussions around the best use for scheme surpluses on the rise.

The analysis showed that the accounting surplus of DB pension schemes for the UK’s 350 largest listed companies increased to £51bn at the end of April 2023, after the value of liabilities fell from £605bn at 31 March 2023 to £590bn at the end of April 2023, due to an increase in corporate bond yields, and a fall in future implied inflation expectations.

This increase was offset, however, by a slight decrease in asset values over the period to £641bn, up from £643bn at the end of March 2023.

Commenting on the recent improvements, Mercer partner, Matt Smith pointed out that discussions around surpluses have been growing, suggesting that, with a significant number of pension schemes having triennial valuations at the end of March and during April, this trend is likely to continue.

However, Smith noted that trustees and companies may have differing views on whom should benefit from the surplus and what its use should be, influenced by both the scheme rules and current levels of risk within individual schemes.

“Despite popular thinking that a surplus should be used for the benefit of members, in most cases it is used to support risk reduction or be held as a reserve against adverse future experience," he continued.

Smith also suggested that, with The Pension Regulator’s new DB funding code delayed until April 2024, trustees and sponsors may be speculating about their scheme reaching a low dependency position by this point through changes in market conditions and asset performance.

Although he acknowledged that this would be "very scheme specific", he explained that if it turns out to be the case, it would be "quite the opposite to other suggestions that the new funding code will cause a significant influx of contributions to pension schemes".

Share Story: