The overall funding levels increased to 107 per cent from the end of November with a total surplus of £47 billion, an increase from £35 billion in December 2022, according to Mercer’s monthly review of the FTSE 350 pension scheme.
Mercer principal and corporate pensions consultant Shane Tuohy says: “By the end of 2022, bond yields had risen materially leading to an improvement in accounting funding positions.
“Commentators at the time suggested we could be entering a new normal of higher interest rates and although they have come down, still remain higher than they have been for decades. We saw an initial rise in yields early in the year, but these have settled slightly, ultimately ending the year lower than they started.
“Compared to 2022, 2023 saw equity-type assets perform much better which further improved funding positions. Many schemes took the opportunity to capitalise on those stronger funding positions, perhaps by de-risking investment strategies to ‘lock in’ positions or looking to secure pension benefits with insurers.
“Following a record level of de-risking transactions in 2023, we expect the trend might continue and evolve into 2024. Schemes that have already mitigated risks associated with market movements might turn their attention to remaining risks, such as longevity.
“And of course there are non-economic risks, as set out in this year’s World Economic Forum, Global Risks Report, such as cybercrime and cyber insecurity, cost of living and impact of climate change to consider. The Pensions Regulator’s long-awaited General Code could bring these into focus.
“Another possible factor here is the Government’s upcoming consultation on options for DB schemes, which is set to look at making extraction of surpluses easier and the role of consolidation. Both of these could have significant implications for end game plans for DB schemes.
“If surplus can be more easily utilised, could running on a scheme become preferable to buying it out with an insurer? And could consolidation be an alternative solution for some? It’s possible that 2024 could bring a sea change in the future of DB schemes.”
