The accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased marginally to £35bn at the end of December 2022, according to Mercer’s Pensions Risk Survey data analysis for December 2022.
The data shows a £111bn increase in funding levels over the course of the year ending in December 2022, in stark contrast to the £76bn shortfall by the end of December 2021.
Rising bond yields caused a minor increase in the surplus in December 2022, pushing it from £31bn at the end of November 2022 to £35bn at the end of December 2022.
According to Mercer, the increase in corporate bond yields, which was partially offset by higher future implied inflation forecasts, caused the present value of obligations to decline from £627bn at the end of November 2022 to £595bn at the end of December 2022. The impact of the liabilities falls was lessened by the decline in asset values, which dropped over the year to £630bn from £658bn at the end of November 2022.
Mercer principal Matt Smith says: “Our analysis shows that the aggregate funding position of FTSE 350 pension schemes, on an accounting basis, ended the year with a surplus, which is in stark contrast to the position at the end of December 2021.
“Some may ask whether this is the new normal. Many pension schemes have stayed resilient despite a year fraught with challenges and market volatility caused by the situation in Ukraine, the continuing impact of Covid-19 and Brexit, and market turbulence caused by the UK’s ‘mini-budget’. Now, schemes may find themselves closer to their end game and may be looking to capitalise on the improvement through 2023.”
Building on prior consultations from TPR and the Department of Works and Pensions (DWP), The Pensions Regulator (TPR) issued two consultations on the regulatory components of the new DB pension financing regime in late 2022, outlining more specifically its expectations for scheme funding. The main prerequisite for pension schemes is that they have a set long-term goal and journey plan.
Smith adds: “The TPR consultation is timely. Trustees and employers are taking stock of what’s next: securing their end game and assessing newer options such as consolidators or pursuing run-off. We expect journey plans will now also be taking account of recent investment changes.
“Overall, 2022 demonstrated the value in robust planning and collaboration, which will be key aspects for trustees and employers in looking forward and agreeing realistic objectives.”