The government plans to unlock around £160 billion in surplus funds held in defined benefit (DB) pension schemes, as announced in the Final Pension Investment Review.
Trustees and employers will have greater flexibility to agree on how surplus funds are utilised under the new rules. This could include improving pensions for current members, boosting retirement benefits for employees, or returning money to the company to support its operations.
The government’s plans are more flexible than expected, allowing surplus funds to be accessed once a scheme exceeds a “low dependency” funding level, with any extra safety margin left to trustees’ discretion rather than required by law. This is a simpler approach than the earlier expected tougher funding rules, like full buyout levels.
Additionally, a new rule will let trustees and companies change scheme rules to allow the use of surplus.
Finally, the government will scrap a specific test that required trustees to prove that releasing surplus funds is “in members’ interests.” This additional test was seen as redundant since trustees are already legally required to act in the best interests of members as part of their fiduciary duty.
These changes reflect the fact that many DB pension schemes are now in strong financial shape. Some have already started using surplus funds, and the new rules will make it easier for more schemes to do the same.
LCP says the approach avoids “unnecessary layers of caution” and makes it easier to benefit both members and sponsoring companies.
LCP partner Steve Hodder says: “We welcome the Government’s ambition in avoiding unnecessary layers of caution in their plans for DB surpluses.
“Of course, it is paramount that member benefits are protected. However, the surpluses of DB schemes today are very real and robust as demonstrated through recent market volatility. Regulators have devoted considerable time and energy in developing a low dependency measure for scheme funding, and that is the right yardstick to allow Trustees to consider if their scheme is now able to productively use its excess assets.
“From our early conversations with Ministers in the last government, the issue of productive use of surplus funds has been thoroughly examined and consulted on, and the Government’s final proposals are to be warmly welcomed.
“The role of pension scheme trustees will now be key, as the industry settles into new norms of using strong DB schemes to benefit scheme members, sponsoring firms and the wider UK economy.”
Isio director Iain McLellan says: “The Government had confirmed earlier this year that it intended to legislate to make it easier to utilise surpluses in DB pension schemes. The response today provides more detail on how their thinking has evolved and the measures they intend to take forward.
“It is positive to see that they have listened to industry feedback, committing to introducing the ability to override restrictive rules, basing surplus extraction around low-dependency funding targets and looking for a collaborative approach to be taken by trustees and sponsors. The introduction of a 100 per cent of benefit PPF underpin option, which didn’t have wide industry support, have been dropped while the launch of a public DB consolidator have been put on the back-burner.
“These proposals mark a significant shift in DB scheme regulation. For two decades, the focus has prioritised securing existing accrued benefits above all else, including future benefit accruals and discretionary increases. The industry is keen to embrace these changes and the opportunity to support growth and greater innovation.
“Trustees have generally been positive but have consistently raised the importance of clear guidance being provided to support their decision making on using any surplus. So far, The Pensions Regulator appears keen to engage with explicit reference in its recent Annual Funding Statement that it views schemes having a surplus policy in place as best practice.”
