The government should change the regulations around DB surpluses, to help boost investment into DC pensions and encouraging greater investment into the UK economy, according to a new report.
Analysis by XPS Pensions Group, investment firm Premier Miton and law firm Burge Salmon suggests regulatory changes around DB surpluses this could unlock £100bn by 2034 — which could be used to close the generational pension gap and release funds for sponsoring companies to invest in their future.
The report comes in response to the Government’s consultation on its proposed Mansion House reforms. As part of the Chancellor’s Mansion House speech, the Government backed an agreement between large DC schemes to invest 5 per cent of their assets in UK private equity by 2030.
The report’s authors believe a similar approach would be unsuitable for the defined benefit market, where many schemes are approaching maturity and risk appetites are generally much lower. However the authors believe that industry and regulatory changes around DB scheme surpluses could free up capital be invested in the UK economy, provided pension savers are also protected.
The industry and regulatory changes proposed by the report, which should be made on the condition that surpluses are used by sponsors to facilitate these investments, include:
- Making long-term run-on for DB schemes a genuinely viable alternative to full insurance buyout, where the circumstances are right to do so.
- Providing sponsoring companies with a legal right to access these pension scheme surpluses, on the condition that the DB scheme is fully funded above insurance buyout levels.
- Removing the 35 per cent tax on funds withdrawn from pension scheme surpluses as an incentive for companies to redeploy such surpluses.
XPS Pensions Group co-CEO Paul Cuff says: “The defined benefit pensions market is rightly focused on protecting the security of members’ benefits. But there’s an opportunity to use pension surpluses to address societal goals – like levelling the playing field between people in DB and DC pension schemes or encouraging investment in companies’ UK operations. The approach we have outlined can contribute to UK growth while protecting DB scheme members’ benefits.”
Premier Miton Group chairman Robert Colthorpe adds: “UK firms must prosper if we want to grow the UK economy and create the wealth that our society needs and depends on. We must therefore ensure that we support UK long term risk capital formation and investment in UK businesses at all stages of scale and growth. We believe the proposals set out in this report enable UK DB schemes to do much more of this without compromising the security of members’ benefits.”
Burges Salmon head of pensions Richard Knight adds: “We believe the ideas set out in this report are realistic, legally supported and actionable. They also have the key advantage of relative simplicity compared to some other ideas in the market.”