FTSE 350 DB funding levels stabilise following market volatility

The aggregate surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from £29bn at the end of October to £31bn at the end of November, according to Mercer’s Pension Risk Survey.

The analysis revealed that the present value of liabilities rose from £600bn at 31 October 2022 to £627bn at the end of November, attributing this to a fall in corporate bond yields, which was partially offset by falling future implied inflation expectations.

As a result, assets outperformed the liabilities, increasing from £629bn at the end of October to £658bn at the end of November.

Reflecting on the movement over the period, Mercer principal, Matt Smith, pointed out that November saw the release of the Chancellor’s Autumn Statement, which focused on shoring up public finances and reassuring markets, explaining that this seems to have had a limited impact on gilt markets in comparison to September's fiscal announcements.

He stated: “The aggregate funding position on an accounting basis appears to have stabilised following the aftermath of the events at the end of September, with a surplus of £31bn at the end of November.

“In contrast to the former Chancellor’s “Growth Plan” in September, the Autumn Statement looks to have had little impact on UK gilt markets, implying some level of confidence in the government’s new fiscal policy but also highlighting the stark contrast in the handling of the two events and the market’s reaction to them.

“However, many pension schemes are likely to be working through the next steps in relation to both their investment strategy and their broader funding plans. Next steps will include consideration of The Pensions Regulator’s statement of 30 November 2022 on liability driven investment (LDI) which reinforced the need for sensible collateral and liquidity management.

“The Pensions Regulator’s recent statement confirms the need for increased focus and tolerances on LDI, as well as strong governance, but pleasingly they have retained a flexible framework for schemes to work through sensibly.

“For pension schemes, this provides a focus for ongoing discussions around risk management.”

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