If surpluses continue to grow, could schemes find themselves at low dependency by the time the new DB funding code comes into force? Matt Smith, Partner at Mercer, examines this issue below.
Mercer’s FTSE 350 analysis shows an increase in surplus from £38bn at end of March 2023 to £51bn at end of April 2023, driven by an increase in bond yields, positive returns from growth assets and a fall in market inflation expectations.
‘Surplus’ is the word amongst pension schemes, but for whom or for what is it? A pot to be spent on improving member benefits, a reserve to protect against adverse movements, money to return to the sponsor, or an amount that supports risk reduction?
TPR has also announced a delay to the new DB funding code, now expected to be April 2024. If surpluses continue to grow, could many schemes find themselves at low dependency by the time the code comes into force?
With bond yields increasing by the end of April, the funding position of the FTSE 350 pension funds on an accounting basis shows a higher surplus, according to Mercer’s Pensions Risk Survey data analysis for April 2023.
The ‘surplus’ topic has been a talking point for a number of months according to Mercer Partner, Matt Smith. With a significant number of pension schemes having triennial valuations at the end of March and during April, he noted this is likely to continue.
“Trustees and companies may have differing views on whom should benefit from the surplus and what its use should be,” he said. “These views will be influenced by both the scheme rules and current levels of risk within individual schemes.
“Despite popular thinking that a surplus should be used for the benefit of members, in most cases it is used to support risk reduction or be held as a reserve against adverse future experience.”
Mr Smith added that for many schemes, funding levels are expected to have improved in recent months. With the Pension Regulator’s new DB funding code being delayed, trustees and sponsors may be speculating about their scheme reaching a low dependency position by this point through changes in market conditions and asset performance.
“This will be very scheme specific, but if it this turns out to be the case, it would be quite the opposite to other suggestions that the new funding code will cause a significant influx of contributions to pension schemes,” he concluded.
Mercer’s Pensions Risk Survey data analysis for April 2023 shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £51bn at the end of April 2023. The present value of liabilities decreased from £605bn at 31 March 2023 to £590bn at the end of April 2023 driven by an increase in corporate bond yields, and a fall in future implied inflation expectations. The rise in liabilities was offset by a slight decrease in asset values over the period to £641bn compared to £643bn at the end of March 2023.
Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.
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