The aggregate funding surplus of FTSE 350 companies’ defined benefit (DB) pension schemes nearly doubled over the first three quarters of 2023, according to Mercer’s latest Pensions Risk Survey.

According to the consultancy, the aggregate surplus increased from £35bn at the start of the year to £67bn at the end of September.

This is equivalent to an aggregate funding level across company accounts of 112 per cent at the end of Q3.

In September, liability values fell from £576bn to £552bn, which Mercer attributed to a rise in corporate bond yields.

Meanwhile, asset values fell from £628bn to £619bn over the same period which, combined with the fall in liabilities, resulted in FTSE 350 firms’ DB schemes experiencing a £15bn increase in aggregate surplus during September.

Mercer stated that the improved funding level raised questions as to what sponsors and trustees might consider doing with any surplus, and called for a change in rules to be enable companies and trustees to put surpluses to better use.

“Companies should reflect on improvements in the funding level of their DB pension scheme over 2023,” said Mercer partner and wealth corporate leader, Simon Turner.

“While the UK government is currently reviewing how surplus cash might be accessed, companies may wish to consider how to use surplus assets if they become accessible.

“Market conditions over 2023 could mean that some companies’ balance sheets are now in surplus. The funding position used to set cash contributions, which is different, may also have improved.

“However, under existing rules, it’s difficult for companies to make use of surplus without first securing the benefits with an insurer.”

Following the Mansion House reforms announcement earlier this year, the government is assessing ways for DB schemes to do more for their members, employers and the economy, and has issued a call for evidence on options for DB schemes that considers the possibility of accessing surpluses more readily and putting them to better use.

“Strict rules on accessing surpluses in DB schemes have led to concerns from companies over cash contributions becoming trapped in these pension schemes,” Turner continued.

“Companies often see this as a barrier to paying additional cash into a DB scheme. Mercer is in favour of a relaxation of the rules to enable trustees and sponsors to agree a release of surplus from an ongoing scheme in appropriate circumstances.

“Whilst it wouldn’t make sense for the entire surplus to be released, much of which serves as a valuable buffer against potential adverse experience, it is worth exploring if portions of surpluses could be accessed.”

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