New research by Mercer will make welcome reading for many Defined Benefit pension holders: the aggregate surplus across company accounts of FTSE 350 pension funds soared to £79 billion in May 2024, the highest level ever recorded. However the announcement does come with a caveat.

Mercer’s Pensions Risk Survey shows the value of liabilities for the UK’s 350 largest listed companies’ defined benefit pension (DB) schemes increased from £584 billion on April 30, 2024, to £590 billion on May 31, 2024. However, asset values increased from £659 billion to £669 billion at the end of May 2024.

Bond yields fell slightly over May, while the market’s expectation for inflation stayed broadly level and equity markets performed well. The funding position of the FTSE 350 pension funds on an accounting basis shows a slight rise in the surplus at the end of May.

While these findings highlight the positive financial position of many FTSE 350 pension funds – with a significant surplus and a slight increase in liabilities – Mercer says that the tightening of credit spreads points to a risk that many DB scheme sponsors will likely be monitoring closely.

Shane Tuohy, Senior Corporate Consultant at Mercer, said: “The aggregate surplus is the strongest we have seen. It might have been even stronger for many individual schemes but for the tightening of credit spreads.

“The current market environment highlights the value companies can draw from strong oversight of schemes’ journey plans and ensuring their funding and investment strategies appropriately reflect the risk appetite of all stakeholders.”

He went on to add that, over the 12 months leading up to the end of May, credit spreads – the difference between equivalent corporate and government bonds prices – have narrowed.

This means that the funding positions reported in companies’ accounts will tend not to be as strong, as had assets been invested to protect the funding position against movements in corporate bond prices. This was evidenced by recent press releases relating to some large UK companies’ year end accounts.

“While schemes usually invest to protect against changes in the prices of government bonds, sponsor’s company accounting positions are driven by changes in the price of corporate bonds. Although having historically had similar movements, these bonds don’t always move in the same direction.

“Credit spreads are now at multi-year lows, with recent falls highlighting the basis risk to which DB schemes’ sponsors are exposed.”

He goes on to make this warning: “With the current uncertainty in geo-politics and UK economic policy, markets might anticipate heightened volatility in these spreads. Sponsors will be keeping a close eye on how credit spreads are impacting their bottom line.”