HM Treasury has confirmed the Government’s plans to relax rules around DB surplus access.
The rule changes will allow surplus funds, currently stuck in pension schemes, be invested in the broader economy which will help drive growth. This is part of a larger effort to clear obstacles, like excessive regulation and planning delays, that are holding back economic progress.
The new rules will only apply if both the pension trustee and the sponsor agree, and the surplus funds could be used in various ways. But experts point out that there’s no sign of measures to reassure trustees about the security of members’ benefits once surplus funds are used.
The prime minister and chancellor are set to explain these changes to Britain’s top CEOs at a roundtable. They are expected to outline how well-funded defined benefit pension schemes, currently sitting on a £160 billion surplus, with 75 per cent of schemes in surplus, will have fewer restrictions on how they can invest those extra funds—something businesses have struggled to do under the current rules.
Chancellor of the Exchequer Rachel Reeves said: “I know this government and businesses are united on growth being the top priority for our economy, which is why I am fighting every day to tear down the biggest barriers to growth, taking on regulators, planning processes and opposition to this urgent mission.”
LCP partner and former pensions minister Steve Webb says: “The government’s commitment to freeing up access to DB surpluses is a very welcome development and offers the potential to benefit employers, pension scheme members and the wider economy. In some cases, it will be possible as things stand for an employer to give a trustee enough comfort about the security of member benefits for the trustee to allow some surplus to be extracted.
“But ideally the government would go further and offer a way of guaranteeing member benefits, such as enhanced cover by the Pension Protection Fund, which would allow all surplus schemes to participate in this new option. We need something bigger and bolder to maximise the potential of these reforms.”
Hymans Roberson head of corporate DB endgame strategy Sachin Patel says: “We welcome the news that the Government’s focus is back on changes to increase the flexibility around DB surplus. Done carefully, with the right guidance and safeguards, this would help to open up the prospect of more DB schemes running-on for longer and in ways that can benefit members, sponsors and, with the right investment opportunities in place, the wider UK economy. There is more than £160bn of surplus capital in private sector DB pensions schemes and growing. But whilst options are available to some schemes, the ability to use surplus does not exist for all.
“As always, the details will be key. To ensure surplus sharing has a meaningful impact, it will be important for current legislative restrictions to be lifted whilst introducing smart tax initiatives. These could include incentives for investing in UK assets or tax-favourable mechanisms for sharing surpluses with other employer-based defined contribution pension schemes. Crucially, any changes should not cut across the fiduciary duties of DB pension scheme trustees and must ensure that existing member benefits continue to be safeguarded and secure.
“With many more schemes now strongly funded, it’s encouraging to see the topic of access to DB surplus gaining some momentum. At this important juncture, any lack of clarity risks stifling decision making and could mean opportunities are missed.”
AJ Bell head of public policy Rachel Vahey says: “The government, desperate to boost UK growth, has long had plans to tap into pension funds as a potential source of new UK investment.
“As part of its pension revolution, it has already put forward plans to create pension ‘megafunds’ by driving consolidation in the defined contribution workplace market. But now it has its eye on harnessing the monetary power of surpluses in defined benefit (DB) schemes.
“It intends to allow part of a DB fund surplus to be returned to the employer for them to invest in their core business, or bolster pension scheme members’ benefits. But in doing so, the government is encouraging trustees to take risks with other people’s money.
“Maxwell and other historic pensions scandals still live long in the memory, and it’s imperative we don’t forget about the pension saver at the heart of this revolution. Trustees have an important role here. They need to be gatekeepers to the surplus, to make sure it is only handed to employers where the members’ financial future isn’t compromised. But they could find themselves caught in the crosshairs, facing pressure from employers on one side to release funds, whilst meeting their number one objective to protect pension scheme members on the other.
“There is no doubt a healthy surplus has built up in many DB schemes, thanks partly to the rise in long-term gilt yields which has led to a reduction in liability values. But there is no guarantee these clement financial conditions will continue, and if employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme.
“The government risks playing fast and loose with people’s financial later lives. It’s imperative that protection is built into any changes to prevent any future Maxwell-style raids on people’s pensions.”
Brightwell CEO Morten Nilsson says: “Current legislation has employers wholly owning the downside of their DB pension schemes but gives no access to the upside. This reform could fundamentally change the way some employers view their DB pension schemes, turning them into valuable assets to nurture.
“Industry wide, we could see increasing numbers of employers opting to run-on their DB pension schemes for the long-term. Having mutual agreement on any surplus release between trustee and employer is key, enabling them to work together to deliver good outcomes. Done carefully, we believe these changes will benefit employers and members and also support the UK economy.”
SPP’s DB committee chair Chris Ramsey says: “As the SPP made clear last April, in certain circumstances it makes sense to make it easier to return surpluses to employers that wish to do this. The proposed measures to enable extraction of surplus could create an economically attractive rationale for sponsors to run on pension schemes, whilst maintaining a reasonable level of security for members and potentially making discretionary increases in benefits more likely. It also has the potential to support the UK economy through supporting the sponsors of DB schemes, and potentially encouraging schemes to invest more in UK based productive assets – although to what extent this occurs is open to question.”
Aon head of UK retirement policy Matthew Arends says: “This announcement marks a seminal moment in UK pensions as the government moves away from the last thirty years of a regime requiring companies to contribute to DB pension schemes by allowing refunds ahead of winding up the pension scheme.
“It will, though, be critical to understand the details of the circumstances in which refunds are possible – certainly, the approval of the trustees appears to be necessary, which provides a mechanism to ensure member benefit security.
“Employers will no doubt welcome the apparent flexibility over the use of surplus, although it remains to be seen what share of refunds is reinvested in the UK economy.”
