Many companies will have to focus more attention on how to manage their pension surplus, LCP has suggested, after research revealed that the aggregate FTSE 100 DB pension surplus broke the £100bn barrier for the first time in mid-May.

Despite volatility in the markets, LCP's analysis showed that the aggregate FTSE 100 pension surplus has grown from £10bn at the start of 2021 to £59bn at the year-end 2021, and is currently over £100bn, with fewer than five FTSE 100 companies in deficit.

The firm also suggested that FTSE 100 companies were sitting on up to an additional £10bn of pension “hidden” surplus due to the long-term impact of the pandemic on life expectancy, which it estimated could result in up to a 2 per cent fall in liabilities.

Whilst this is currently 'hidden', as many are not currently recognising this impact within their corporate accounts, the firm suggested there may be an increase in the number of companies making an allowance this year, further improving the aggregate position.

Rising bond yields have also helped improve funding levels, as LCP revealed that yields have risen to over 3 per cent pa in 2022, a landmark not seen since the EU referendum in mid-2016, which has in turn reduced liabilities by a further 20 per cent since year end.

In addition to this, the firm noted that whilst current high levels of inflation, as well as increases in expectations for future inflation levels, have increased pension liabilities for the FTSE 100 by £40bn, pension scheme assets will likely offset this to an extent and dampen the impact on corporate balance sheets.

Indeed, the company pointed out that many schemes will have seen assets rise more than their liabilities due to the caps on pension increases.

However, LCP partner and author of the report, Jonathan Griffith, warned that whilst the takeaway from this year's report at first glance is that "this is job done and FTSE 100 pension schemes are now an asset for UK Plc", there are further considerations ahead.

“Whilst it’s clearly good news that more schemes are now in surplus, with rising inflation, a potential recession and a new funding code on the horizon, scheme sponsors need to make sure that they understand how much of a surplus they really have, how to manage it, and think about how they best buffer their schemes against the headwinds to come," he explained.

In particular, the report raised considerations around recognising a surplus on corporate balance sheets, and the impact of IFRIC14, which limits recognition of surplus to cases where the company can derive economic value from the surplus, requiring it to have an unconditional right to the surplus.

LCP suggested that more companies will be 'bitten' by these rules as IAS19 positions improve, pointing out that this is already demonstrated in 2020 and 2021 accounts, where around one in five FTSE100 companies now disclose some form of balance sheet restriction.

Concerns around overfunding and efficient use of company resources could also prompt an increase in the use of contingent funding mechanisms, according to LCP, which revealed that over a quarter of FTSE100s already use some form of this to support their pension scheme.

More broadly, the report also revealed that pension scheme investments in equities have reduced to just 15 per cent, down from over 60 per cent 20 years ago.

LCP highlighted this trend as reflection of less need for high investment returns as schemes have become better funded, as well as the move towards lower risk strategies and schemes having a shorter time horizon.

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