The accounting surplus of defined benefit (DB) pension schemes for the 350 largest UK-listed companies fell to £5bn at the end of September, according to Mercer’s FTSE350 analysis.
Liabilities decreased due to higher corporate bond yields from £657bn on August 31, 2022, to £605 billion on September 30, according to data analysis from Mercer’s Pensions Risk Survey.
Additionally, asset values decreased over time to £610bn from £666bn at the end of August, which lessened the impact of the declines in liability.
Mercer UK wealth trustee leader Tess Page says: “The aggregate funding position on an accounting basis has been incredibly volatile during September, soaring to a surplus of over £100bn last week, before settling at a surplus £5bn at the end of September.
“The catalyst was in gilt markets – notably a surge in yields after the UK Chancellor of the Exchequer’s ‘mini-budget’ was announced on 23 September, which increased speculation of further interest rate hikes to curb inflation amid expectations of increased Government borrowing.”
Page adds: “There will be schemes that were forced sellers of assets, and funding positions will have been sorely tested.
“To add to trustees’ headaches, the current situation could potentially have implications on the covenant strength of some employers, and their ability to pay contributions, as higher interest rates will mean that borrowing becomes more expensive at a time where they are also facing rising costs and global supply chain issues.
“It is crucial for trustees and employers to take stock of where they are and consider what future scenarios may unfold, and what contingency plans are in place through their integrated risk management frameworks, to manage risk.”