The aggregate surplus of FTSE 350 companies’ defined benefit (DB) pension schemes reached a record £79bn in May 2024, according to analysis from Mercer, marking the highest level ever recorded.

Mercer’s Pensions Risk Survey showed that liability values rose from £584bn at the end of April to £590bn at the end of May, although this was offset by an increase in asset values, from £659bn to £669bn.

The funding position of the FTSE 350 pension funds on an accounting basis also showed a slight rise in the surplus at the end of May.

Whilst these findings highlight the positive financial position of many FTSE 350 pension funds, Mercer cautioned that the tightening of credit spreads points to a risk that many DB scheme sponsors will likely be monitoring closely.

Indeed, Mercer senior corporate consultant, Shane Tuohy, pointed out that while the aggregate surplus is the strongest we have seen, "it might have been even stronger for many individual schemes but for the tightening of credit spreads".

The firm pointed out that credit spreads narrowed over the 12 months leading up to the end of May, meaning that the funding positions reported in companies’ accounts will tend not to be as strong, as had assets been invested to protect the funding position against movements in corporate bond prices.

Given this, Tuohy highlighted the current market environment as demonstration of the value companies can draw from strong oversight of schemes’ journey plans and ensuring their funding and investment strategies appropriately reflect the risk appetite of all stakeholders.

She stated: “While schemes usually invest to protect against changes in the prices of government bonds, sponsor’s company accounting positions are driven by changes in the price of corporate bonds.

"Although having historically had similar movements, these bonds don’t always move in the same direction.

“Credit spreads are now at multi-year lows, with recent falls highlighting the basis risk to which DB schemes’ sponsors are exposed.

"With the current uncertainty in geo-politics and UK economic policy might anticipate heightened volatility in these spreads. Sponsors will be keeping a close eye on how credit spreads are impacting their bottom line."

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