FTSE 350 reaches record funding surplus – but then what? 

• Mercer’s FTSE 350 analysis shows an increase in surplus from £51bn at end of April 2023 to £69bn at end of May 2023.
• Increases were driven by an uptick in bond yields and small fall in market implied inflation over the month.
• Well-funded DB pension plans have the potential to become a source of competitive advantage.

The funding position of the FTSE 350 pension funds on an accounting basis reached a record high last month, with bond yields increasing further over the month and year to end of May 2023, according to Mercer’s Pensions Risk Survey data analysis.

The vast majority of schemes now have material surpluses on an accounting basis, with many schemes also becoming well-funded against their long term funding targets or even against the cost of buyout.

Mercer Principal, John Gething said, “This is leading to a lot of interest from companies and trustees in exploring the range of end game options. They are seeing the expected level of profit and value being passed to an insurer if they secure outcomes externally and are considering alternative, potentially more efficient options.”

Whilst some schemes may consider buying-out benefits with an insurer, other trustees and companies are considering if and how, to run-on their schemes for the benefit of the members and the company. 

Depending on the scheme’s circumstances, companies may want to consider if they can access future excess returns in the pension plan if they are not needed to pay members’ benefits. There may also be opportunities for trustees to maintain (or even increase) member security, whilst potentially providing greater inflation protection for members.  Where circumstances permit, there is the potential for significant win-win outcomes for companies and trustees.

Mr Gething added, “For some schemes, these may be achievable objectives but the way to do it will vary from case to case and be subject to scheme specifics and legal advice – for the simplest cases, it could be as straightforward as a framework agreement between the company and trustees.

“This isn’t a new idea, but is becoming increasingly relevant as funding levels have improved.”

Several firms already have this type of arrangement in place, according to Mr Gething, including FTSE100 firms and large private companies, as well as smaller organisations. 

“Even the Pensions Regulator is referring to running-on as a suitable option for some in its Annual Statement,” he added.

“For the first time in a very long time, some legacy DB pension plans have the potential to become a source of value and competitive advantage for companies.” 

Mercer’s Pensions Risk Survey data analysis for May 2023 shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £69bn at the end of May 2023. The present value of liabilities decreased from £590bn at 30 April 2023, to £550bn at the end of May 2023 driven by a large increase in bond yields, and a small fall in future implied inflation expectations. The rise in liabilities was partially offset by a decrease in asset values over the period from £641bn at the end of April, to £619bn at the end of May 2023. 

Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.

About Mercer (as at March 2022)

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 83,000 colleagues and annual revenue of approximately $20 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.