The government has today launched a major consultation on the UK’s defined benefit pensions that includes proposals for easing access to DB surpluses and establishing a public sector consolidator.
The consultation aims to support schemes to invest for surplus in productive asset allocations by making it easier to share scheme surplus with employers and scheme members, remove practical barriers to surplus extraction such as those relating to scheme rules and remove behavioural barriers by bringing surplus extraction in line with trustee duties.
Former pensions minister Steve Webb, a partner at LCP, says extracting surplus from pension schemes will only work if member benefits are 100 per cent protected by a new Pension Protection Fund (PPF) underpin.
The government says surplus ‘should only be extracted where safe to do so from a member benefit perspective’. It adds that in all cases, trustees would retain responsibility for managing scheme funding levels, and says extracting surplus will not be conditional on use of funds for particular purposes.
The government also intends to establish a public sector consolidator administered by the PPF by 2026. The aims of the consolidator will be to provide an alternative endgame solution for DB schemes unattractive to commercial consolidation providers, enable greater investment in high-growth UK assets and minimise the potential distortion of the superfund and insurance buyout markets.
The consultation says: “We are clear that changes to the surplus sharing regime should be made only where they are safe from a member benefit perspective. We are consulting on a range of potential safeguards to ensure these additional flexibilities for trustees do not threaten member security.
Pensions minister Paul Maynard MP says: “Private sector DB schemes will play an important role in this vision for the future of the pensions market. That is why, at autumn statement, we committed to make it easier for trustees of well-funded schemes to make payments from surplus to sponsoring employers and scheme members.
“The government also committed to establish a public sector consolidator targeted at schemes unattractive to commercial providers. We must give more choice to DB scheme trustees and their sponsoring employers. To do this, we will press ahead with creating a permanent legislative regime for Superfund consolidators. We must also ensure that by establishing a public sector consolidator operated by PPF by 2026, we drive better outcomes and improve member security for schemes unattractive to existing commercial consolidation providers.
“Against the backdrop of maturing schemes and improved funding levels, the introduction of superfunds will provide a secure alternative to traditional avenues for relatively well funded schemes. However, we believe opportunities will remain restricted for schemes less attractive to commercial providers. In response, we will establish a public sector consolidator by 2026 aimed at schemes unattractive to commercial endgame providers.
Webb says: “The suggestion of a ‘statutory over-ride’ to make sure that all DB schemes in robust financial health could explore options around surplus extraction is a very positive one.
“But with regard to surplus extraction, we do not believe many trustees would be reassured if the only safeguard for members before money could be taken out was that the scheme was currently well funded. Our proposal for full PPF cover, backed by a new PPF super-levy, would give trustees comfort that member benefits were fully protected regardless of what happened to the sponsoring employer in future, and could free up many billions of pounds of DB pension scheme assets to be invested more productively”.
Laura McLaren, head of DB actuarial consulting, Hymans Robertson, says: “We’re pleased the Government has supported our call to link conditions for surplus extraction to scheme funding level and security of accrued rights. We also welcome the proposal that extracting surplus will not be conditional on use of funds for particular purposes. Surplus extraction will be more effective where it is part of a larger reframing of the statutory objective for DB, to bring about a DB renaissance and secure future pension provision.”
Isio director and head of research & development, Iain McLellan, says: ‘’The last 20 years of defined benefit pensions regulation has prioritised the security of benefits that have already been built up over everything else, including future accrual and discretionary benefits. This has led to a narrow focus on de-risking and ultimately fully insuring accrued benefits for some £1.4 trillion of assets. This position is exacerbated by the complexities of the exact wording on schemes rules as to whether or not any surplus that may exist can be returned to the sponsor.
“The Government’s consultation, launched today, looking at options for using surpluses could help unlock the huge value potential stored in UK DB pension schemes. This includes looking at introducing a statutory override to allow scheme rules to be changed to enable surpluses to be distributed, changing the tax rules to allow one-off payments to members and looking at safeguards to ensure excessive surplus distributions are not paid. We believe these are the right areas to focus on if we are going to enable DB schemes to deliver more value for members and the sponsors that have supported them over many decades.”
Simon Kew, head of market engagement, Broadstone, says: “The DWP consultation on DB schemes seeks to deliver on many of the government’s stated aims for the sector, primarily freeing up capital to invest more productively.
“Given the drastic improvements in funding levels, it makes sense to enable greater scheme flexibility for surpluses and could deliver significant economic benefits. However, any extraction of surplus from a scheme will have a knock-on impact for member security – we are pleased to see the DWP acknowledge this but protecting member benefits must be the utmost priority as these reforms progress.
“The outlined plans for establishing a public sector consolidator by 2026 could open up opportunities for some schemes – particularly at the smaller end of the market – albeit we are expecting new entrants in the market this year to provide further supply for unprecedented de-risking demand.”