The funding position of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £29bn at the end of October, up from £5bn at the end of September.

Mercer’s Pensions Risk Survey data analysis for October showed that liabilities for the cohort fell from £605bn at 30 September 2022 to £600bn at the end of October.

Despite recent short term operational and liquidity issues, many schemes will have benefited from the market volatility, Mercer said.

A fall in future implied inflation expectations largely offset falling corporate bond yields, while the reduction in fixed income returns was also positive for asset values, which increased over the period to £629bn compared to £610bn at the end of September.

Mercer principal, Matt Smith, said that the change in accounting surplus means that this may be the first-time trustees and employers have been within touching distance of estimates of insurance pricing.

However, in a busy insurance market, schemes may be "fighting for attention". In this situation, it may be prudent to consider other options, rather than defaulting to buy-in and buyout, Smith suggested.

"Trustees might also consider that alternatives such as consolidators, master trust and low-dependency run-on may offer attractive benefits in a higher yield environment," he said.

Smith also said that schemes may face strong calls to increase pension payments in light of the increase in the cost of living.

“October also revealed the September-to-September inflation figures which is used for many pension schemes to determine the next annual pension increase," he continued.

"Many schemes will have a cap on pension increases, resulting in members’ pensions eroding in real terms in the current high-inflation environment. Others may have no increase and in other cases, increases will be discretionary.

“Trustees and employers may come under increasing pressure from members to provide additional or discretionary increases in light of the increase in the cost of living.

"While various factors will influence decision-making on this point, it may be harder to justify not providing additional increases based on funding levels alone when some schemes may now see funding levels closing in on buyout.”

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