The aggregate surplus of FTSE 350 companies’ defined benefit (DB) pension schemes improved during the 2023 calendar year, despite falling by £12bn to £47bn at the end of December 2023, Mercer’s latest analysis has revealed.

The group's tracker showed a decrease in the aggregate funding level across company accounts since the end of November 2023, reaching 107 per cent at the end of December 2023.

This was due to an increase in the value of liabilities from £579bn to £629bn at the end of December 2023, driven by a fall in corporate bond yields, which was partially offset after asset values increased from £638bn to £676bn.

Despite the slight fall in December, Mercer pointed out that the aggregate surplus of £47bn marks an improvement over the calendar year, comparing to a £35bn surplus at the end of December 2022.

Mercer principal and corporate pensions consultant, Shane Tuohy, explained that, by the end of 2022, bond yields had risen materially leading to an improvement in accounting funding positions.

“Commentators at the time suggested we could be entering a new normal of higher interest rates and although they have come down, still remain higher than they have been for decades,” he stated.

“We saw an initial rise in yields early in the year, but these have settled slightly, ultimately ending the year lower than they started.

“Compared to 2022, 2023 saw equity type assets perform much better which further improved funding positions. Many schemes took the opportunity to capitalise on those stronger funding positions, perhaps by de-risking investment strategies to ‘lock in’ positions or looking to secure pension benefits with insurers.”

Tuohy suggested that record demand for de-risking transactions seen in 2023 could be set to continue and evolve in 2024, explaining that schemes that have already mitigated risks associated with market movements might turn their attention to remaining risks, such as longevity.

"And of course there are non-economic risks, as set out in this year’s World Economic Forum, Global Risks Report, such as cybercrime and cyber insecurity, cost of living and impact of climate change to consider," he continued. "The Pensions Regulator’s long-awaited General Code could bring these into focus."

In addition to this, Tuohy pointed out that the government's upcoming consultation on options for DB schemes, which is set to look at making extraction of surpluses easier and the role of consolidation, could have significant implications for end game plans for DB schemes.

“If surplus can be more easily utilised, could running on a scheme become preferable to buying it out with an insurer? And could consolidation be an alternative solution for some?" he queried. "It’s possible that 2024 could bring a sea change in the future of DB schemes.”

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