WTW has released a white paper calling for six pension policy changes aimed at driving UK economic growth.
The paper, titled “Six changes to seize the DB pension surplus opportunity,” suggests that defined benefit (DB) pension scheme surpluses should be utilised to benefit employers, pensioners, and employees saving in defined contribution (DC) schemes.
The changes would support the government’s aim of encouraging productive investment by permitting schemes to make alternative investments and produce surpluses.
WTW suggests simple legal avenues for DB surpluses to fund DC scheme contributions, redefining lump sum payments for DB pensioners as “authorised payments,” reviewing funding and investment strategy regulations, lowering the tax rate on surplus refunds to employers, amending the law to make surplus refunds simpler, and reviewing the statutory goals of the Pensions Regulator.
These changes would promote greater investment returns and enable more effective utilisation of current surpluses.
WTW head of UK retirement business Rash Bhabra says: “With DB members getting older, and less time left until pensions need to be paid, there is no going back to the days when schemes routinely invested mostly in return-seeking assets. Proposals for change that are not realistic about this risk flying too close to the sun.
“But, with almost £1.5 trillion of assets in private sector DB schemes, it would only take a minority of schemes choosing to keep a small proportion of their portfolios in return-seeking assets for longer to have a big effect. The resources available for productive investment could be tens of billions of pounds higher than if schemes continued on their current path.
“The current regulatory framework incentivises schemes to predominantly de-risk once they are well funded, rather than continue to invest more productively. Our proposals are aimed at shifting that balance. The key is to change the environment schemes operate in, so that there is seen to be value in generating surpluses that can be used to benefit employers, pensioners and current employees saving through DC schemes.
“For example, one reason why few well-funded schemes have helped pensioners affected by high inflation is that employers have been reluctant to sanction pension increases that will affect pension values decades into the future; so it should be possible to give pensioners one-off lump sums. Employers will also be more comfortable supporting strategies that could see a scheme become over-funded if they can access some of the surplus sooner and without a tax penalty.
“Most schemes are already in surplus even on the cautious basis that they were supposed to be working towards over the coming years. So there is an opportunity to put some of this money to use now. By making clear that this is acceptable, which current draft regulations do not, the Government could give employers and trustees an appetite for pursuing further surpluses.
“Employers, pensioners, employees saving in DC schemes, and the wider economy could all benefit if the Government makes the right policy calls.”