The 350 largest UK-listed businesses’ defined benefit (DB) pension accounting surplus rose to £79bn in May 2024, the highest level ever recorded, according to Mercer’s Pensions Risk Survey data.
According to Mercer, in may, bond yields saw slight decreases but inflation remained stable. Mercer’s Pensions Risk Survey analysis revealed a slight rise in the surplus of FTSE 350 pension funds’ accounting position.
The data shows that a large number of FTSE 350 pension funds are in a healthy financial position, with a notable surplus and a slight rise in liabilities but the tightening of credit spreads indicates a risk.
The difference between equivalent corporate and government bonds prices has shrunk over the last 12 months. According to Mercer, the funding positions in corporations’ accounts seem weaker compared to when assets were invested to hedge against changes in the price of corporate bonds.
Mercer senior corporate consultant Shane Tuohysays: “The aggregate surplus is the strongest we have seen. It might have been even stronger for many individual schemes but for the tightening of credit spreads.
“The current market environment highlights the value companies can draw from strong oversight of schemes’ journey plans and ensuring their funding and investment strategies appropriately reflect the risk appetite of all stakeholders.”
“While schemes usually invest to protect against changes in the prices of government bonds, sponsor’s company accounting positions are driven by changes in the price of corporate bonds. Although having historically had similar movements, these bonds don’t always move in the same direction.
“Credit spreads are now at multi-year lows, with recent falls highlighting the basis risk to which DB schemes’ sponsors are exposed. With the current uncertainty in geo-politics and UK economic policy might anticipate heightened volatility in these spreads. Sponsors will be keeping a close eye on how credit spreads are impacting their bottom line.
