The 350 largest UK-listed businesses’ defined benefit (DB) pension accounting surplus fell to £52bn from £54bn by the end of August 2023, according to Mercer’s Pensions Risk Survey data for August 2023.
According to Mercer, this loss is due to the present value of liabilities decreased from £583bn on July 31, 2023, to £576bn at the end of August 2023, primarily as a result of higher corporate bond yields, which were partially offset by growing market-implied inflation.
Asset values also fell, from £637bn to £628bn by the end of August 2023.
Mercer global defined benefit segment leader Graham Pearce says: “The UK DB pensions market finds itself at a crossroads, as many schemes are nearing the funding level needed to secure benefits with an insurer.”
“As more DB liabilities move to the balance sheets of a smaller group of insurers, it is important to think through the implications of this change in how the UK delivers DB pensions. In other parts of Europe, consolidation into large, robust and well-governed vehicles has generally been preferred to the buy-out route.
“Many of those are operating like insurance companies, making appointments to bring their standards of governance in line with insurers. Under a consolidation approach, pensions can potentially be financed with a healthier risk appetite than can be tolerated by an insurer, which can lower the cost of pension provision.”
Mercer strategic risk management leader for Europe John O’Brien says: “The cultural and legal backdrop for pensions can vary hugely. While comparison of risk transfer patterns with the UK is informative, it does not always tell the entire story. In many countries, there is simply no active risk transfer market. Pension plans have little option but to soldier on.
“Where risk transfer markets do exist, developed countries tend to have confidence in the insurance regime. But the reality is nobody knows where politics could take that regulation over time. As history has shown, there can be political gain in relaxing regulation when memories of past financial crises fade.”
“The UK is fortunate to have markets for risk transfer and alternatives which coexist, challenging one another. Risk transfer to insurance companies will be the decision made for many schemes but, for the sake of financial stability and member outcomes, it’s a decision which shouldn’t be reached without that challenge.”
