Chancellor Rachel Reeves is set to announce changes to DB pension surplus rules, which could unlock £100bn for businesses, boost member benefits, and address pension investment issues.
The industry sees this as a win for both employers and members but calls for clear guidance and simple rules to ensure surpluses are managed securely.
Experts warn that these changes could slow buy-out activity for larger schemes, while smaller schemes may proceed sooner.
There are also concerns about the gilt market, as delays in buy-outs could support demand, but excessive reforms might push schemes to sell gilts, increasing government borrowing costs. A 25 per cent tax on surplus withdrawals could help mitigate this.
Barnett Waddingham partner Ian Mills says: “It’s great to hear that the Chancellor is expected to announce reforms to how companies can access their DB pension surpluses.
“The current rules have created an artificial incentive on DB schemes to de-risk at any cost. That has led to value destruction on a colossal scale. DB schemes invest overly prudently, starving the UK economy of the capital it so desperately needs to grow. At the same time, most schemes currently insure as soon as it’s practical to do so, transferring an enormous amount of value from the corporate sector to the insurance markets, especially for those schemes that are still quite immature.
“Reforming the rules in the right way would be to the benefit of all key stakeholders. Companies will be able to access surplus funds locked-up in their schemes and members will have the opportunity to share in that, increasing their benefits. The economy as a whole will see a greater level of much-needed capital investment. Many businesses receiving a share of their DB surpluses will choose to reinvest it in their business, creating jobs and growing the economy. Schemes will likely choose to invest more productively, helping to provide the capital needed for growth.
“However, it’s important to get the details right. Clearly, taking money out of DB schemes could worsen the security of the benefits promised from them. The rules regarding when and how money can be accessed will be critical. So we’ll be pouring over the details as soon as they’re published.
“The main loser is likely to be the insurance industry. If scheme sponsors can access surpluses then they will be less keen to buy-out. However, most schemes will still buy-out, but just later than they otherwise would. We could see a slow-down in insurance buy-out deals, especially at the larger end of the market where running-on is likely to be most cost-effective. Smaller schemes are still likely to buy-out as soon as they can, as their higher proportional running costs make running-on uneconomical. We expect to see innovation in consolidation vehicles, aimed at enabling smaller schemes to access economies of scale and reap the benefits of running-on.
“Whilst these reforms would undoubtedly be positive overall the Government needs to avoid going too far. It won’t have escaped Rachel Reeves’ attention that the DB pension market remains a key buyer of gilts, whereas buy-out insurers tend to hold much lower allocations. Encouraging schemes to run-on for a while could be supportive of the gilt market.
“But reforms that go too far could encourage DB schemes to dump these gilts onto the market, forcing up the Government’s borrowing cost going forwards. This could, however, be offset to some degree by an acceleration of tax revenue – surplus withdrawals attract a 25 per cent immediate tax charge.”
XPS Group senior consultant Tom Froggett says: “This is a very significant and positive development. There is a fantastic opportunity here to improve outcomes for members and employers. Our analysis shows that DB surplus flexibilities could unlock £100bn of value over the next decade, providing substantial benefits to both members and employers, while supporting the government’s growth agenda.
“The key challenge will be to implement the DB surplus flexibilities effectively and safely. In our view this means having two key things – firstly, a simple statutory override to enable surplus to be released, and secondly clear regulatory guidance that offers trustees a comprehensive blueprint for running DB schemes on to build and use surplus effectively.”
