The government has announced plans to release GBP160 billion in “trapped surpluses” held by the UK’s defined benefit (DB) pension schemes.
Announcing the move this week, Chancellor Rachel Reeves said the money could be invested in the wider economy, used to fuel economic growth and to enhance member benefits.
“I know this government and businesses are united on growth being the top priority for our economy, which is why I am fighting every day to tear down the biggest barriers to growth, taking on regulators, planning processes and opposition to this urgent mission.”
Tearing down such barriers include removing legislative restrictions on when a surplus can be paid to an employer, both on an on-going basis and whilst the scheme is in wind-up. These restrictions may prevent surplus being repaid, or may require the completion of processes that are likely to be complex, time-consuming and require engagement with members and The Pensions Regulator (TPR).
The government has support for reform from various pension industry stakeholders including the Pensions and Lifetime Saving Association (PLSA) which argues that surpluses could be used for more ambitious investment strategies.
Zoe Alexander, Director of Policy and Advocacy at the PLSA, says: “Lowering the legislative threshold for allowing returns of surplus could potentially encourage trustees, in conjunction with their employers, to adopt a more ambitious mindset and take on slightly riskier investment strategies for their DB assets, including greater investment in UK assets.”
Similarly, Jonathan Lipkin, Director of Policy, Strategy & Innovation at the Investment Association, says unlocking surplus capital from DB schemes has “the potential to both boost UK growth by opening up investment opportunities for companies and their stakeholders, as well as the possibility of higher pensions for scheme members”.
He added: “With around GBP1.1 trillion in assets, DB schemes already make a significant contribution to the funding of the UK economy and public services. With the right guardrails in place, the government’s proposals could help channel more funding into the economy, by enabling schemes to invest more widely and take on greater risk, while allowing for members to receive an uplift to pension benefits.”
However, government will need to convince trustees, who have a clear fiduciary duty to protect their members, that access to surpluses will not be the detriment to the future security of their scheme.
Nausicaa Delfas, Chief Executive of TPR, says: “Many DB pension schemes are better funded than at any point in recent history – with around 80 per cent of schemes fully funded.”
“[But] our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits. Where schemes are fully funded and there are protections in place for members, we support efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy.”
The government will set out the details of the surplus policy in its response to the Options for Defined Benefits consultation, due this spring.
