The government has announced plans to lift restrictions on the defined benefit pension scheme (DB). This will allow millions of pounds in surplus funds from the scheme to be invested into the economy.
The prime minister and chancellor, who met with leaders of the business world today, explained how occupational DB funds that are well-funded and performing well can invest their surplus funds.
Currently, surpluses can only be accessed by schemes that passed a resolution prior to 2016. This means not all schemes are eligible for their surplus – even if trustees and sponsors wish to do so.
All DB schemes could change their rules if there was an agreement between the trustee and employer. This would enable trustees to evaluate the options they have in striking a deal between employers and scheme members to improve member outcomes.
Sir Keir said: “The mission number one of my government is securing growth, driving higher living standards for all, and getting more money in people’s pocket. The only way to achieve the changes our country needs is by rewiring its economy. It requires creative reforms, the removal obstacles, and a relentless focus.
My government will not accept the current status quo, whether it is in terms of how public services are managed, regulations or pension rules. The changes made today will unlock billions in investment and help me to deliver my Plan for Change.”
Pension trustees and sponsors could use excess funds to boost their productivity – either to drive growth and increase wages, or to unlock more money for members of pension schemes.
When DB pension scheme trustees share a portion with a sponsoring company, the employer can choose to invest this money in the core business of their company, such as purchasing equipment or supplies and/or providing additional benefits to pension scheme members.
DB pension surplus
Around 75% of pension schemes have surpluses, totaling PS160 billion. However, restrictions make it difficult for businesses to invest these funds. The reforms are based on Rachel Reeves’ Mansion House Reforms, which created pension “megafunds”, as part of the largest pension reforms for decades. They unlock billions of pounds in investment into businesses, infrastructure, and local projects.
Jonathan Lipkin is the director of strategy, policy and innovation for the Investment Association. He said that unlocking the surplus capital of DB schemes could boost UK growth, both by allowing companies to invest and their stakeholders to benefit, and also by enabling scheme members to receive higher pensions. DB schemes contribute significantly to funding the UK’s economy and public services with their assets of around PS1.1 trillion.
The government’s proposal could channel more funds into the economy by allowing schemes to take on more risk and invest more widely, while also allowing members to get a boost to their pension benefits.
Redirecting funds to DC schemes
Zoe Alexander is the director of policy and advocacy for the Pensions and Lifetime Saving Association. She said, “The PLSA supports surplus release with the appropriate protections to ensure that member benefits are secured. Surpluses can be used to boost DB scheme benefits, or to fund employer-sponsored defined contribution workplace schemes.
The lower threshold for allowing surplus returns could encourage trustees to take on a slightly more risky investment strategy for their DB assets. This includes a greater investment in UK assets.
Patrick Heath-Lay said, “It’s good to know that the government is taking a look at the entire pension industry.” This will allow the UK to unlock more of its PS2.9 trillion in pension savings. It will benefit both the savers as well as the economy.
We look forward to seeing other pension plans adopt our plan and outline how they will invest on private markets.
The Pensions Regulator, TPR, expressed their support for these proposals. Nausicaa Defas, CEO, stated: “Many DB Pension Schemes are better funded today than ever before – around 80% of them fully funded.”
Our first priority is to make sure that pension scheme members receive their promised benefits. We support trustees’ and employers’ efforts to consider ways to release surplus funds if they can improve member benefits, or unlock investment for the wider economy.
In its response Options For Defined Benefits Consultation due in Spring, the government will provide details on the DB excess policy.