Pensions experts react to government’s DB surplus plan

Pensions experts have largely welcomed new proposals from the government to allow surplus funds in DB schemes to be invested in the wider economy.

It intends to allow part of a DB fund surplus to be returned to the employer for them to invest in their core business, or bolster pension-scheme members’ benefits.

However, Rachel Vahey – head of public policy at AJ Bell – said in doing so, the government is “encouraging trustees to take risks with other people’s money”.

TPR chief executive Nausicaa Delfas said: “Many defined-benefit pension schemes are better funded than at any point in recent history – with around 80% of schemes fully funded.

“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.”

David Lane, CEO of TPT Retirement Solutions, said: “Proposals for DB scheme surplus extraction pre-date the current Labour government but are now being considered more seriously as it looks for any and all potential drivers of future economic growth.

“The good news for the government is that the idea should solicit industry support from UK corporates, the backstop for DB scheme security, particularly given the recent increase to employer National Insurance contributions.

“In this respect, we believe that surplus extraction will be a more effective driver of economic growth than the currently proposed DC consolidation plans or the introduction of any sort of compulsion on Trustees to invest in UK assets.”

However, Lane added that “any loosening of the regulations, however, will need to ensure that member protection remains central, and Trustees will need to be convinced that this is in their best interest”.

Chris Ramsey, chair of the SPP’s DB Committee, said: “As the SPP made clear last April, in certain circumstances it makes sense to make it easier to return surpluses to employers that wish to do this.

“The proposed measures to enable extraction of surplus could create an economically attractive rationale for sponsors to run on pension schemes, while maintaining a reasonable level of security for members and potentially making discretionary increases in benefits more likely.

“It also has the potential to support the UK economy through supporting the sponsors of DB schemes, and potentially encouraging schemes to invest more in UK-based productive assets – although to what extent this occurs is open to question.”

But Ramsey went on to caution: “The proposals are not without risk. Any extraction of surplus could reduce the security of member benefits. As a result, the proposals need to be very carefully considered to ensure an appropriate balance is maintained.”

Vahey added: “The government, desperate to boost UK growth, has long had plans to tap into pension funds as a potential source of new UK investment.

“As part of its pension revolution, it has already put forward plans to create pension ‘megafunds’ by driving consolidation in the defined contribution workplace market.

“But now it has its eye on harnessing the monetary power of surpluses in defined benefit (DB) schemes.

“Maxwell and other historic pensions scandals still live long in the memory, and it’s imperative we don’t forget about the pension saver at the heart of this revolution. Trustees have an important role here.

“They need to be gatekeepers to the surplus, to make sure it is only handed to employers where the members’ financial future isn’t compromised.

“But they could find themselves caught in the crosshairs, facing pressure from employers on one side to release funds while meeting their number one objective to protect pension-scheme members on the other.”

Vahey said there is “no doubt” a healthy surplus has built up in many DB schemes, thanks partly to the rise in long-term gilt yields that has led to a reduction in liability values.

However, she added, there is no guarantee these clement financial conditions will continue, and if employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme.

“The government risks playing fast and loose with people’s financial later lives. It’s imperative that protection is built into any changes to prevent any future Maxwell-style raids on people’s pensions,” she concluded.