Pension surplus tax cut is ‘step in the right direction’ though more work is needed to reform the market – Mercer 

Mercer’s monthly analysis of FTSE 350 pension funds up to the end of November shows the Autumn Statement delivered that month by the Chancellor of the Exchequer did not have a material impact on the defined benefit (DB) pension schemes funding positions, as seen in recent fiscal events. Mercer’s analysis shows a slight decrease in the aggregate funding level across company accounts since the end of October 2023, reaching 110% at the end of November 2023. 

During his statement, the Chancellor announced changes to the tax rate on DB pension surplus’ by reducing the tax rate from 35 per cent to 25 per cent on surplus withdrawals. While this may benefit companies currently in the process of buyout, many companies disclosing a positive pension scheme balance sheet position still face strict rules on accessing any surplus.

Simon Turner, Partner and UK Wealth Corporate leader at Mercer said, “The new headline rate of 25 per cent tax on pension fund surplus will be welcomed by companies who are close to winding up pension schemes and who have ready access to surplus.”

However, Mr Turner added that the Chancellor did not take the opportunity to address the wider challenges for sponsors and trustees that might wish to access any surplus; challenges that are now subject to a government consultation.

“Some companies may feel that a pension fund surplus is sitting on its balance sheet due to an inability to govern how it can be used,” added Mr Turner. “Some of the restrictions are in place for the right reasons to protect employees, but if used correctly and with the right oversight assets could potentially be invested in productive assets to aid UK growth.

“This winter’s consultation is the bigger piece of the surplus puzzle. It is something companies will be keeping a close eye on in the coming months and we look forward to contributing to the consultation.”

Background to the November analysis:

Bond yields decreased over November and equity markets grew. The funding position of the FTSE 350 pension funds on an accounting basis shows a smaller surplus than at the end of October according to Mercer’s Pensions Risk Survey data analysis for November 2023.

The analysis shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies decreased to £59bn at the end of November 2023. The present value of liabilities increased from £540bn on 31 October 2023 to £579bn at the end of November 2023 driven by a fall in corporate bond yields. Asset values increased from £608bn to £638bn at the end of November 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 adopted 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.

Notes to Editors

Mercer estimates the aggregate combined funded ratio of plans operated by FTSE350 companies on a monthly basis. This is based on projections of their reported financial statements adjusted from each company’s financial year end in line with financial indices. This includes UK domestic funded and unfunded plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the FTSE350 companies at 31 December 2019 was £775 billion, compared with estimated aggregate liabilities of £815 billion. Allowing for changes in financial markets through to 30 November 2023, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £638 billion, compared with the estimated value of the aggregate liabilities of £579 billion.

About Mercer

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 more than 85,000 colleagues and annual revenue of over $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 mercer.com. Follow Mercer on LinkedIn and X.