Industry experts generally welcome the proposed decrease in the tax charge for sponsoring employers accessing surpluses from their defined benefit (DB) pension schemes, reducing it from 35 per cent to 25 per cent. However, there are also concerns about the need for careful implementation to safeguard member benefits and ensure alignment with broader societal goals.
Barnett Waddingham principal and senior consulting actuary Mark Tinsley says: “Reducing the authorised surplus payments charge from 35 per cent to 25 per cent, as announced in the little green book, is welcome news, especially for those schemes that already have a surplus on a buyout basis. Firms paying into schemes, who bear much of the risk, have long felt penalised by a 35 per cent tax on exit and have often taken actions to avoid a “trapped surplus” emerging in the first place. The announced changes will therefore hopefully go some way to alleviating these concerns, which in turn could speed up the timeframe to full buyout funding for some schemes.
“Due to the way that the tax charge is applied, the 25 per cent headline rate actually equates to a 20 per cent tax charge on the surplus in practice. Therefore, the change potentially introduces unintended future tax avoidance opportunities – a potential net 5 per cent saving for companies with a 25 per cent corporation tax rate. There are practical reasons why companies are perhaps unlikely to look to exploit this loophole, though Mr Hunt would be well advised to introduce anti-avoidance tests.
“More generally, the Government has signalled that it remains keen to further explore ways in which barriers to returning surpluses to sponsors can be removed and incentivise investment in “productive investment” in the process. While we are supportive of the general policy intent, it is essential that appropriate safeguards are put in place to protect savers and the Pension Protection Fund from the risks of the proposals under consideration.”
Insight Investment head of client solutions group Serkan Bektas says: “The Autumn Statement is a significant step towards realising the full potential of Defined Benefit pension funds to better serve members, corporate sponsors and the overall UK economy, unlocking the full potential of the £1.5 trillion invested by schemes.”
“Today, DB schemes are better funded and healthier than ever, offering a once-in-a-generation opportunity to secure the benefits of millions of individuals and contribute to the economy overall.
“We welcome the proposed consultations on mechanisms to refund surpluses, reduce taxation on surpluses and the enhancements to Pension Protection Fund cover. These important measures will enable schemes to run on and generate surpluses within prudent parameters to benefit their members, corporate sponsors and the UK economy. We are pleased to see the measures announced are well aligned with the proposals Insight presented during our participation in the Work & Pensions Committee inquiry into Defined Benefit Pension Schemes.”
“To achieve the best outcomes for pensioners, many schemes can grow their surpluses potentially supporting increased benefits without compromising the security of retirement incomes.”
Cardano senior director Nick Gibson says: “For DB pension schemes and their sponsors, the potential impact of the measures announced today could be significant.
“For corporate sponsors, the changes could increase opportunities to unlock value from their schemes, and allocate additional capital towards their corporate growth strategies. In that way, the government hopes that this will help to accelerate investment into UK productive finance, recognising that there are many potential uses of the additional capital raised. This all comes in the context of uncertainty from sponsors around access to surplus. Our recent research revealed that the vast majority of CFOs are unsure of their scheme’s potential access to a future surplus* and how that could impact their DB scheme’s strategy. Introducing a tax benefit and providing greater flexibility for accessing any surplus would provide further incentive to revisit the potential value opportunity from doing so, thereby addressing this uncertainty.
“From a trustee perspective, it will be important that any additional flexibility introduced around accessing surplus does not increase the risk to the security of member benefits. To that point, we welcome the proposed review of new mechanisms to protect members as part of the consultation into changing surplus rules.
“The impact on schemes could lead to very different strategies. Where schemes continue to be restricted from accessing any surplus until wind-up, the tax reduction could accelerate the corporate desire to buy-out. However, where scheme surpluses can be accessed on an ongoing basis, there may be more incentive to run-on, providing that there are sufficient safeguards in place to protect member benefits as part of a comprehensive risk management framework and run-on strategy.
“Overall, with many DB schemes enjoying improved funding levels, it has never been more important for companies and trustees to revisit their strategy and ultimate objective for their DB scheme. As part of that, companies and trustees need to fully understand their ability to access any scheme surplus, and how that could change if rule changes are introduced.”
TPT Retirement Solutions business development director Nicholas Clapp says: “The proposal to make it easier for sponsoring employers to access scheme surpluses could be hugely beneficial. Releasing this capital for business investment could fuel economic growth. These reforms also create an incentive for schemes to run on, serving as an alternative solution to an insurer buyout. This could benefit trustees, sponsors and pension scheme members by providing more endgame options.”
Aon partner Alex Beecraft says: “Today’s announcement is a landmark moment for the DB pensions industry that reflects the improved funding situation facing many schemes. If enacted, new flexibilities on recovering surplus could make it easier for sponsors to obtain a refund on the significant contributions made over the last decade, while preserving ongoing member experience and benefit flexibility.
“Key to this will be testing the strength of its sponsor, capital strategy and governance arrangements to show that pensions will remain secure outside of insurance.”
Hymans Robertson partner Eliane Torry says: “We welcome the government cutting tax for pension scheme sponsors that wish to extract surplus. Tax incentives are one tool that could help to align DB scheme choices with society’s wider aims. However, incentives to extract surplus would only be effective as part of a broader reframing of objectives for DB schemes. Using surplus to fund pension costs may simply free up business cash for other uses, so the government needs implement tax incentives in a way that they end up creating value and help the wider economy.”
