Consultants have welcomed the tax cut on DB funds surpluses — but have called for the government to go further in enabling these assets to be put to use for the good of companies and their employees.
Mercer’s monthly analysis of FTSE 350 pension funds shows that the Autumn Statement did not have a material impact on the funding level of DB schemes, although there was a slight decrease in the aggregate funding level across company accounts since the end of October 2023 — reaching 110 per cent at the end of November 2023.
The Autumn Statement delivered positive news for DB schemes with the Chancellor announced changes to the taxation of these schemes, with the tax rate reduced from 35 per cent to 25 per cent on surplus withdrawals.
Mercer points out that the will benefit companies currently in the process of buyout. However it says that while this is a ‘step in the right direction’, it will not necessarily benefit all companies which are now disclosing a positive pension scheme balance sheet position, as many still face strict rules on accessing any surplus.
Mercer partner and UK wealth corporate leader Simon Turner says: “The new headline rate of 25 per cent tax on pension fund surplus will be welcomed by companies who are close to winding up pension schemes and who have ready access to surplus.”
But he says this change does not address the wider challenges for sponsors and trustees that might wish to access any surplus — although these challenges are now subject to a government consultation. One area under discussion is whether more can be done to use these surplus funds to support additional investment into DC pensions.
Turner adds: “Some companies may feel that a pension fund surplus is sitting on its balance sheet due to an inability to govern how it can be used.
“Some of the restrictions are in place for the right reasons to protect employees, but if used correctly and with the right oversight assets could potentially be invested in productive assets to aid UK growth.
“This winter’s consultation is the bigger piece of the surplus puzzle. It is something companies will be keeping a close eye on in the coming months and we look forward to contributing to the consultation.”
Looking at the funding of these schemes, Mercer’s Pensions Risk survey shows the accounting surplus of the DB schemes for the UK’s 350 largest listed companies decreased to £59bn at the end of November 2023. The present value of liabilities increased from £540bn on 31 October 2023 to £579bn at the end of November 2023, driven by a fall in corporate bond yields.
Asset values increased from £608bn to £638bn at the end of November 2023.
