The aggregate funding level of FTSE 350 companies’ defined benefit (DB) pension schemes fell by 1 percentage point to 110 per cent in February, data from Mercer has revealed.

At the end of February, FTSE 350 firms’ DB schemes had an aggregate surplus of £59bn, down from £64bn at the end of January.

Mercer’s Pensions Risk Survey showed that liability values increased from £597bn to £603bn in February.

This was partially offset by asset values rising slightly, from £661bn to £662bn, over the same period.

The consultancy noted that bond yields and the market’s expectation for inflation both increased slightly during February.

The government launched a consultation in February, which explores proposals to help make DB pension surplus extraction easier amid high funding levels.

“While we have historically high DB surpluses they will continue to be in the spotlight,” commented Mercer principal and policy expert, Robbie Smith.

“The consultation has the potential to unlock surpluses to support employers’ businesses. The presence of a DB scheme on a balance sheet can often be seen as something which offers lots of risk and little reward, but that could be about to change.”

"The proposals could have far-reaching implications for DB schemes’ long-term strategies. For example, facilitating surplus access could encourage more use of run-on strategies over longer periods and a lower demand for insurance transactions.

“The questions being asked are less whether a surplus should be accessed, more when and how; this is likely to be contentious. While we can probably all agree that surplus assets should be put to use, what is equitable to members and sponsors? Conclusions will need to be reached on the threshold over which surplus extraction would be safe and then, who should benefit from any extraction. Trustees and sponsors of DB schemes might well have very different views on the answers to these questions.

“Although a switch to a Labour-led government later this year appears likely, its plan for financial services announced an intention which follows the current government’s agenda around UK productive assets quite closely - this consultation shouldn’t be disregarded.”

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