The aggregate surplus of FTSE 350 companies’ defined benefit (DB) pension schemes increased by £7bn to £66bn on an accounting basis in March, analysis by Mercer has shown.

Bond yields and the market’s expectation for inflation both fell over the month, with asset values rising from £662bn to £679bn in March.

This was partially offset by liability values also increasing during the month, rising from £603bn at the end of February to £613bn at the end of March.

The aggregate funding level also rose by 1 percentage point in March to 111 per cent at the end of the month.

However, while FTSE 350 DB schemes’ strong funding positions continued to improve, offering a buffer against downside risk and more flexibility in investment strategies, Mercer noted that many DB schemes were not opting to invest in UK productive assets.

Mercer head of corporate investment consulting, Adam Lane, commented: “With DB schemes currently well-funded, the government has turned its attention to encouraging them to invest for UK growth in what it calls productive assets. But we worry that many UK pension schemes will not be rushing to invest in such assets as they continue to de-risk.”

The government is consulting on plans to encourage DB schemes to invest for surplus in productive UK assets, but Mercer said it remained to be seen whether this would work as intended.

Lane noted that pension schemes needed compelling investment opportunities that meet their requirements.

“The nature of DB schemes means that risky, illiquid or non-competitive UK assets will not fit the bill unless they are adequately compensated,” he added.

“Absent further measures, we do not see DB assets supporting UK growth in the way the government intends.

“Instead, over the next five years, we see UK asset exposure reducing as schemes dispose of their gilt portfolios to finance buyout deals with insurers.”

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