Mercer’s latest review of FTSE 350 pension schemes highlights significant increases in bond yields during January 2024.
According to Mercer’s study, corporate account funding levels are expected to recover overall and reach 111 per cent by the end of January 2024, marking a turnaround from the December 2023 decrease.
Bond yields increased while UK stock markets declined in January. In comparison to December, Mercer’s analysis of the FTSE 350 pension funds for January 2024 reveals a healthier surplus.
The accounting surplus for defined benefit pension plans of the top 350 UK employers hit £64 billion by the end of January, according to Mercer. Higher corporate bond yields caused liabilities to drop from £629 billion at the end of December 2023 to £597 billion by January 2024. Asset values dropped from £676 billion to £661 billion by the end of January.
Mercer head of corporate investment consulting Adam Lane says: “Pension scheme funding positions are tied to the market and the volatility we’ve seen over the last few months really brings this into focus. Markets are pricing in falls in interest rates during 2024, but this should not be seen as the expected outcome.
“Our analysis suggests £300bn of pension assets could potentially be transferred to insurers in the coming years requiring significant sales of government bonds which, in the absence of any new buyers, is likely to put major upward pressure on yields and UK finances. It would seem volatility is here to stay for pension schemes.
“With the improvement we’ve seen in schemes’ funding positions since 2021, many schemes have taken action to lock in these stronger positions by de-risking their investment portfolios. Many schemes who have not passed their liabilities to an insurer have been making larger allocations to credit instruments and hedging funding positions against market movements.
“However, while many schemes will now be running lower levels of risk, residual risks will have become more pronounced as a result. For example, we anticipate those who have increased allocations to credit-instruments will now be bearing a larger amount of credit risk. We expect that this may come into sharper focus through the remainder of 2024.”
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