The surplus on FTSE 350 pension funds stood at an aggregate of £59bn at the end of February according to Mercer’s latest analysis.
Mercer says these surplus levels have now persisted for almost two years. The figures show an aggregate funding love of 110%, just a modest decline from the 111% recorded at the end of January.
Mercer says that new regulations proposed by the government have the potential to unlock these surplus funds to support employers’ businesses.
It counts to the new consultation, launched in February on options for DB schemes, which explores some “radical proposals” that challenge the concept that DB schemes’ central purpose is to pay the benefits promised to members.
The Government consultation aims to encourage schemes to ‘invest for surplus’ and to ‘bring surplus extraction in line with trustee duties’.
The rate of tax levied on refunds of surplus to sponsoring employers will be reduced from 6 April 2024, but the threshold for refunds to be paid remains high for the time being. This is one area the Government is looking at and the consultation proposes to lower the bar, in Mercer’s view a more critical piece of the puzzle.
Mercer principal and policy expert Robbie Smith says: “ While we have historically high DB surpluses they will continue to be in the spotlight. The consultation has the potential to unlock surpluses to support employers’ businesses. The presence of a DB scheme on a balance sheet can often be seen as something which offers lots of risk and little reward, but that could be about to change.”
“The proposals could have far-reaching implications for DB schemes’ long-term strategies. For example, facilitating surplus access could encourage more use of run-on strategies over longer periods and a lower demand for insurance transactions.”
He adds: “The questions being asked are less whether a surplus should be accessed, more when and how; this is likely to be contentious. While we can probably all agree that surplus assets should be put to use, what is equitable to members and sponsors? Conclusions will need to be reached on the threshold over which surplus extraction would be safe and then, who should benefit from any extraction. Trustees and sponsors of DB schemes might well have very different views on the answers to these questions.”
He adds that although a switch to a Labour-led government later this year appears likely, its plan for financial services announced an intention which follows the current Government’s agenda around UK productive assets quite closely.
The consultation is due to close on 19 April. Mercer said it will respond and monitor the outcome of this closely.