Pensions - Articles - FTSE 350 pension surplus continues to grow

At October 31 2023, the FTSE 350 accounting surplus stands at £68bn; virtually a complete reversal from the deficit of 18 months ago. 2024 could be a busy year for restructuring and M&A activity. With much stronger funding positions, many DB schemes have become a more valuable part of merger considerations

 Mercer’s Pensions Risk Survey data analysis for October 2023 shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies reached £68bn, almost a complete reversal from roughly the same level of deficit at the end of Q1 2022. For companies considering M&A activity, many DB pension schemes might no longer be considered a risk to be avoided and instead, might be perceived as a valuable addition to any deal.

 “Buyers looking to acquire UK businesses have historically been cautious of the presence of a DB pension scheme and the associated up-front funding, particularly when schemes are in deficit,” said Shane Tuohy, a senior corporate consultant at Mercer. “The sustained surpluses we are seeing across company pension schemes could now lead to a step change in how DB schemes are viewed as part of wider corporate transactions.”

 With the aggregate pension surplus across the FTSE 350 increasing dramatically over the last two years, Mercer sees this change in DB schemes’ funding position playing a more positive role in potential transactions.

 “Buyers who are looking to acquire targets with DB schemes have a number of options for creating deal value,” said Mr Tuohy. “Some might be able to take the scheme off company books at little or no cost by securing the benefits with an insurer. Others might choose to run schemes on to extract value. They might offer enhanced security in exchange for an investment strategy which works harder or insure part of the risk associated with the DB scheme via the use of a captive vehicle. 

 A strong funding position does not eliminate all of the issues associated with a DB scheme though. Trustee engagement, careful governance and risk management, which still have costs associated with them, are crucial, as is the necessary due diligence process as part of any deal.”

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