The combined IAS 19 surplus of FTSE 100 firms’ defined benefit (DB) pension schemes increased by £50bn year-on-year to £60bn at the end of December 2021, according to analysis from LCP.

However, the consultancy stated that ‘calm heads’ would be needed in the coming year to navigate inflation and mortality assumptions.

LCP warned that inflationary shocks and changes in life expectancy assumptions were the ‘key issues’ that would need careful thought by scheme sponsors at the start of this year.

Firms were urged to consider adjusting their assumptions to reflect the current position, depending on the circumstances of the scheme.

LCP’s Health Analytics team found there was rationale that supported a reduction of up to 2 per cent of IAS 19 liabilities in some circumstances.

The reduction of liabilities was partly due to the direct impact of Covid-19, although LCP noted there was also the indirect impact from fewer health diagnoses and higher levels of deaths from factors other than Covid-19.

This liability reduction translated to a fall of around £10bn for FTSE 100 schemes and £35bn across all UK pension schemes.

LCP noted that high inflation figures granted increases to some scheme members that could have been higher than allowed for within corporate accounting figures.

The consultancy estimated that inflation had already weakened UK corporate balance sheets by around £20bn due to the impact on pension scheme valuations, while warning that this could be “much worse” if it turns out to be more than a temporary blip.

LCP therefore encouraged companies to consider their schemes’ investments and hedging strategies to ensure they remained appropriate, and they are aware of the level of risk.

According to LCP’s figures, eight FTSE 100 firms currently have an IAS 19 deficit.

Commenting on the findings, LCP partner, Jonathan Griffith, said: “There is an element of deja-vu as scheme sponsors deal with another year end against the economic backdrop of Covid uncertainty.

“Whilst the position of FTSE 100 pensions schemes is thankfully much improved relative to 12 months ago, there will still be a lot for scheme sponsors to consider.

“Calm heads are needed to navigate some of the big issues this year and their material impact on schemes and actual cash payments in future.

“This includes the recent high inflation figures and how best to adjust mortality assumptions to allow for the impact of the pandemic.”

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