Strong funding positions are a buffer against downside risk and offer schemes more flexibility over investment strategy, but many DB schemes are not choosing UK productive assets.
Mercer’s monthly analysis of FTSE 350 pension schemes shows an aggregate surplus which improved slightly over March 2024. The aggregate funding level was 111% at the end of March, increasing from 110% at the end of February.
Adam Lane, head of corporate investment consulting at Mercer, said “With DB schemes currently well-funded, the Government has turned its attention to encouraging them to invest for UK growth in what it calls productive assets. But we worry that many UK pension schemes will not be rushing to invest in such assets as they continue to de-risk.”
The Government is currently consulting on measures to encourage Defined Benefit (DB) schemes to “invest for surplus” in productive asset types, but whether this will work as intended is to be seen.
Mr Lane continued “pension schemes, like all investors, need compelling investment opportunities and for those opportunities to meet their requirements. The nature of DB schemes means that risky, illiquid or non-competitive UK assets will not fit the bill unless they are adequately compensated.”
The Government’s ongoing consultation on Options for DB Schemes looks at measures which might expand risk appetites, but it does not encourage investment in UK productive assets specifically. Mercer believes the Government would need to go further to achieve its aim to change the behaviour of UK schemes.
Mr Lane went on to say “absent further measures, we do not see DB assets supporting UK growth in the way the Government intends. Instead, over the next five years, we see UK asset exposure reducing as schemes dispose of their gilt portfolios to finance buy-out deals with insurers.”
Background to the March analysis:
Bond yields and the market’s expectation for inflation both fell slightly over March. The funding position of the FTSE 350 pension funds on an accounting basis shows a slight rise in the surplus at the end of March according to Mercer’s Pensions Risk Survey data analysis for March 2024.
The analysis shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from £59bn to £66bn at the end of March 2024. The present value of liabilities increased from £603bn on 29 February 2024 to £613bn on 28 March 2024. Asset values increased from £662bn to £679bn at the end of March 2024.
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.
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