While many FTSE 350 corporate accounts will disclose more positive pension scheme balance sheet positions, strict rules on access to surpluses prevent them being used.
Mercer advocates for a change in rules to enable companies and trustees to put surpluses to better use.
Analysis from Merce of FTSE 350 pension funds shows a marked increase in the aggregate funding level across company accounts since the start of the year, reaching 112% at the end of Q3 2023.
Mercer’s Pensions Risk Survey data analysis for September 2023 shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £67bn from £35bn at the start of the year. This raises questions as to what sponsors and trustees might consider doing with any surplus.
Simon Turner, Partner and Wealth Corporate Leader said, “Companies should reflect on improvements in the funding level of their defined benefit pension scheme over 2023. While the UK Government is currently reviewing how surplus cash might be accessed, companies may wish to consider how to use surplus assets if they become accessible.”
With the aggregate surplus across the FTSE 350 almost doubling since 31 December 2022, companies may already be considering their end of 2023 accounting position. Many sets of company accounts paint a positive picture. Companies might be required to continue to pay cash contributions into these schemes, which may seem counter intuitive.
“Market conditions over 2023 could mean that some companies’ balance sheets are now in surplus. The funding position used to set cash contributions, which is different, may also have improved. However, under existing rules, it’s difficult for companies to make use of surplus without first securing the benefits with an insurer,” said Mr Turner.
Following the Chancellor’s Mansion House speech in July this year, the government is looking at ways for DB schemes to work harder for members, employers and the economy. The government’s call for evidence on options for DB schemes considers the possibility of accessing surpluses more readily and putting them to better use, as well as exploring tax changes for release of surplus.
“Strict rules on accessing surpluses in DB schemes, including pena tax charges, have led to concerns from companies over cash contributions becoming trapped in these pension schemes.” said Mr Turner. “Companies often see this as a barrier to paying additional cash into a DB scheme.”
“Mercer is in favour of a relaxation of the rules to enable trustees and sponsors to agree a release of surplus from an ongoing scheme in appropriate circumstances. Whilst it wouldn’t make sense for the entire surplus to be released, much of which serves as a valuable buffer against potential adverse experience, it is worth exploring if portions of surpluses could be accessed.”
Mr Turner illustrated a simplified hypothetical example of the potential impact of a relaxation, where a release of one quarter of the FTSE 350 surplus, with tax levied at a rate of, say, 25%, might raise £4bn in tax revenue and leave £12bn to be shared between companies and scheme members.
“Whilst it is essential to ensure adequate protection remains in place for DB beneficiaries, such a change could be a win-win-win for UK plc, the scheme member and the Treasury,” he added.
Background to the September analysis
Bond yields increased again over September and future market expectations for inflation fell slightly. The funding position of the FTSE 350 pension funds on an accounting basis shows a larger surplus than at the end of August according to Mercer’s Pensions Risk Survey data analysis for September 2023.
The analysis shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £67bn at the end of September 2023. The present value of liabilities decreased from £576bn on 31 August 2023 to £552bn at the end of September 2023 driven by a rise in corporate bond yields. Asset values decreased from £628bn to £619bn at the end of September 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 adopted 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.
|
