The funding position of the FTSE 350 pension funds reached a record high in May, reaching £69bn by the end of the month, according to Mercer’s Pensions Risk Survey data analysis.

The data showed that there was an increase of £18bn in accounting surplus of defined benefit (DB) compared to £51bn at the end of April 2023.

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

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

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.”

Following the release of itsdata, Mercer stated that 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.

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 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.”

The data also found that the present value of liabilities decreased from £590bn at the end of April to £550bn at the end of May, which has been driven by a large increase in bond yields, with a small fall in future implied inflation expectations.

Furthermore, the rise in liabilities was partially offset by a decrease in asset values over a period of £641bn at the end of April, to £619bn at the end of May.

Mercer’s 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.

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