Peter Sturgess, one of the Glamorgan fungus group sent me the upper photo as he had collected (May 2014) this 'Cordyceps' from a site near Llandovery where he has been undertaking an ecological survey. He was not sure of the species as he had not dug it out to see if there was an insect or truffle beneath but had kept a dried specimen. I did microscopy on a small portion of this which showed spores of Ophiocordyceps gracilis Deer Fungus.
Peter returned to this area of unimproved grassland recently (a year later) and found further specimens, digging one out with care to show the large mummified caterpillar. This specimen seems to have a double head and grows from one end, the caterpillar must lie vertically. With the more common Scarlet Caterpillar Club, Cordyceps militaris the caterpillar seems to lie horizontal and the fungus grows from several points along the body. Peter reburied the caterpillar + fungus so that it could infect more passing caterpillars. I am not sure if he intends to return next May!
Further comment 3rd June. What lepidoptera caterpillar species are parasitized by this fungus? It seems that members of 'Swift moth' are the victims. A report by Vivien Hodge in Field Mycology 2012, vol 13(1) p34-36, on finding this species says in that case it was Hepialus lupulinus, Common Swift Moth. The larval foodplants are the roots of grasses and other plants so at what stage does it get infected by fungal spores?