Mercer’s most recent analysis of FTSE 350 pension schemes’ funding levels shows a small increase in surplus from £49bn at the end of June 2023 to £54bn at the end of July 2023, driven by equity performance over the month.

This means that the funding level of defined benefit (DB) pension schemes of FTSE 350 companies increased from 108% to 109% and has not dipped below 105% since the start of 2023.

Mercer pointed out that with funding improvements which began in early 2022, some are questioning the need for The Pensions Regulator’s (TPR) incoming UK Funding Code, at least in its current form.

Matt Smith, partner at Mercer, said: “The government has been looking for ways to increase DB pension schemes’ investment in what it calls ‘productive finance’ to support UK growth. TPR’s new DB Funding Code, as consulted upon at the beginning of the year, would pull schemes in the opposite direction.”

Smith added that with the resurgence of strong funding positions and surpluses some are now questioning the need for the new DB Funding Code from the regulator, however he does not expect it to disappear entirely.

He continued: “Since the Mansion House announcements, TPR have stated it will clarify how the Code will accommodate investment in growth assets for open and immature schemes.

“This leaves us with uncertainty about when the new DB Funding Code will come into force and what it will say when it does. But ignoring the proposed new funding regime would be a mistake for trustees and sponsors alike,” Smith continued.

He pointed out that for some, this uncertainty could “cast doubt” over how best to proceed with an ongoing valuation and those planning ahead for valuations falling over the next six to 12 months.

However, Smith added that trustees and sponsors will still be adhering to the high level principles of the draft Funding Code, planning for the long-term and seeking to reduce dependency of a scheme on its sponsor as set out in the TPR’s 2023 Annual Funding Statement.

Smith continued: “At a time of heightened global and UK macroeconomic uncertainty, strong governance, clear objectives and rigorous risk management are all crucial – this is equally true for pension schemes and businesses.

“Trustees and sponsors who take the time to understand the current draft of the DB Funding Code, as well as where they might be currently deviating from it, will be better positioned to navigate whichever direction the Code ultimately takes.”

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