The aggregate surplus of FTSE 350 companies’ defined benefit (DB) pension schemes increased from £33bn at the end of January to £47bn at the end of February 2023, analysis from Mercer has revealed.

According to the research, the value of liabilities fell from £622bn as of the end of January to £589bn at the end of February 2023 driven by a rise in corporate bond yields, although this was offset to an extent by a rise in future implied inflation expectations.

Alongside this, the analysis showed that asset values fell to a lesser extent over the period to £636bn, compared to £655bn at the end of January 2023.

Mercer also suggested that the recent increasing bond yields, improved funding positions and potential concerns over availability of liquidity are set to drive a "bumper year" for risk transfer activity in 2023.

However, it argued that the questions posed by the new funding regulations and DB funding code may also prompt a shift from implementing a journey plan to considering how to utilise surplus and whether risk transfer is appropriate.

In particular, Mercer principal, Matt Smith, argued that “the real question should be whether other alternatives might add more value in high yield environments”.

He stated: “Trustees and sponsors are finding that with the current improved funding position they are reaching the end of their journey plan much sooner than expected and in many cases are defaulting towards a risk transfer solution.

“The current market environment provides a great opportunity to revisit journey plans, consider adjustments to funding and investment strategies, but also consider whether risk transfer is the only option available.

“Risk transfer options, consolidators, DB master trusts, captives as well as other risk management techniques may also be attractive options in a high yield environment, depending on the circumstances of the scheme.

“It shouldn’t be one size fits all. Defaulting towards risk transfer presents a risk that other potential value adding pathways will be missed.”

Smith also noted that for those schemes targeting a risk transfer transaction in the near future, it is likely that the current market environment and strong funding positions will continue to provide opportunities for those who are ready to take them.

“The importance of having a robust plan in place, as well as clean data and understood benefits is higher than ever – but this is also true if alternative options are being considered,” he continued.

“Regardless of an individual scheme’s end game it is important not to forget that data is key and should be the primary focus.”

Mercer’s Pensions Risk Survey data relates to approximately 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.


This article first appeared on our sister title, Pensions Age.

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