The £1.2 trillion sitting in defined benefit schemes offers a potential lifeline to address some of the financial pressures the country is facing – including national debt exceeding 100 per cent of GDP, an ageing population, and escalating public sector pension costs.
This was the key takeaway from a roundtable discussion with Insight Investment experts: Serkan Bektas, head of client solutions group, Rob Gall, head of market strategy, and Jos Vermeulen, head of solution design.
The Mansion House speech outlined the government’s efforts to unlock pension capital to support UK economic growth, focusing on consolidating pension schemes. This includes exploring ways to access £1.2 trillion in defined benefit (DB) schemes, £600 billion in defined contribution (DC) schemes, and £400 billion in Local Government Pension Schemes (LGPS).
While DB schemes were not specifically mentioned in the speech, a follow-up letter confirmed their priority, with plans to revisit DB pension reforms in the new year and introduce a pensions bill by mid-2025.
This focus on DB pension schemes, which have benefitted from both strong asset performance and growing interest rates, is gaining traction. As many schemes are now sitting on surpluses, the buyout option is becoming more appealing.
Vermeulen highlighted the shift in the funding landscape, and stated: “The strong performance of assets means DB pensions are in a good position, and the buyout option is now much sooner than expected.”
However, the government’s consultation has led some schemes to pause, reconsidering whether to “run on” rather than buy out. Vermeulen explained: “If the government looks at allowing surplus release and increasing PPF protection levels, then all of a sudden, sponsors have an incentive to run on pension schemes and the trustee concern about not buying out will go away.”
The government’s upcoming pensions bill, scheduled for mid-2025, is expected to play a pivotal role in shaping the future of pension scheme consolidation and buyouts.
Bektas cautioned: “This could be a once-in-a-generation opportunity to unlock the potential of pension surpluses to fuel economic growth.” The risk of delay is significant, as missed opportunities could prevent pension funds from aligning with broader economic goals.
Additionally, the government is pushing efforts to encourage pension schemes to invest in productive assets like infrastructure. Discussions are underway to link lower pension charges to the amount invested in these key areas.
Vermeulen explained: “The idea is to align pension schemes’ interests with the UK’s economic goals, ensuring that pension funds are contributing to the infrastructure projects and innovations needed to drive growth.”
As the pension landscape evolves from focusing on deficit management to leveraging surpluses, trustees are becoming more mindful of the need to act prudently. Bektas warned, “Pension surpluses can be used effectively, but trustees and sponsors will want to avoid swinging back into deficit.”
Gall also addressed the challenges in government bond markets, noting that while the UK faces heavy borrowing needs—“almost 300 billion a year for the next five years”—the bond market has adjusted, with rising yields attracting international investors.
The UK stands out as a “high-yielding market” compared to the US and France, with less political and debt-related strain. Gall believes that much of the hard work in stabilising supply and interest rates has already been done, making current dynamics more manageable. However Insight warned that all that stabilisation might be undone if pension schemes head for buy-out.
Experts say the next few years are key to unlocking pension funds’ potential to support the UK economy. They say delays could result in the loss of this opportunity, but with the right regulations, government incentives, and prompt action, pension funds can play a key role.
