Stewart Hastie, Morten Nilsson and Ian Mills
Potential plans to move forward with legislation to make it easier for sponsors to unlock defined benefit (DB) scheme surpluses have been welcomed by the industry.
This morning (27 January), articles by the Financial Times and Sky News reported that chancellor Rachel Reeves will use her growth speech on Wednesday to set out plans to "unlock" DB surpluses in a bid to help boost the economy.
It is understood the surplus release plan could be included in the Pension Schemes Bill expected to be published in the coming months.
The industry welcomed the news that the government might potentially move forward with legislative change to help unlock the excess value available in the UK's £1.4trn of DB schemes.
Association of Consulting Actuaries chair Stewart Hastie said: "Subject to appropriate safeguards, it is hoped that legislation will remove the ‘scheme rules lottery' and bring about more flexibility for the long-term benefit of UK employers, current and future workers, and pension scheme members as well as support the UK growth agenda.
"As consulting actuaries to UK DB schemes, we look forward to working with government and other industry bodies to support changes that are workable, sustainable and safeguard members' benefits built up."
Brightwell chief executive Morten Nilsson also commented on the speculation.
He said: "In most cases, companies can't access any of the surplus which sits in their pension schemes until the scheme is wound up.
"We would welcome the government including legislation in the Pension Schemes Bill to make it easier for strong employers, with well-managed pension schemes, to access scheme surplus subject to appropriate permissions and safeguards."
Nilsson added: "This reform has the potential to fundamentally change the way employers view their defined benefit pension schemes, transforming them from liabilities to offload, into valuable assets worth running on for the longer term."
He said, to be successful, clear guidance for trustees would be needed to define who decides whether a payment is made, when it's made, and the size of such a payment.
Nilsson said: "Done carefully, we believe that these changes would not only benefit employers and members but also support the UK economy."
XPS Group senior consultant Tom Froggett added that his firm's analysis showed DB surplus flexibilities could unlock as much as £100bn of value over the next decade if the plans were implemented effectively and safely.
He said: "In our view this means having two key things - firstly, a simple statutory override to enable surplus to be released, and secondly clear regulatory guidance that offers trustees a comprehensive blueprint for running DB schemes on to build and use surplus effectively."
A boost for the UK economy
Barnett Waddingham partner and head of DB endgame strategy Ian Mills said it was "great to hear" the chancellor is expected to announce reforms to how companies can access their DB pension surpluses.
He said: "The current rules have created an artificial incentive on DB schemes to de-risk at any cost. That has led to value destruction on a colossal scale. DB schemes invest overly prudently, starving the UK economy of the capital it so desperately needs to grow. At the same time, most schemes currently insure as soon as it's practical to do so, transferring an enormous amount of value from the corporate sector to the insurance markets, especially for those schemes that are still quite immature.
"Reforming the rules in the right way would be to the benefit of all key stakeholders. Companies will be able to access surplus funds locked-up in their schemes and members will have the opportunity to share in that, increasing their benefits. The economy as a whole will see a greater level of much-needed capital investment. Many businesses receiving a share of their DB surpluses will choose to reinvest it in their business, creating jobs and growing the economy. Schemes will likely choose to invest more productively, helping to provide the capital needed for growth."
Despite this, Mills said it was "important to get the details right". He said: "Clearly, taking money out of DB schemes could worsen the security of the benefits promised from them. The rules regarding when and how money can be accessed will be critical. So we'll be pouring over the details as soon as they're published."
Insight Investment head of solution design Jos Vermeulen agreed: "This would not only provide a short-term boost to the UK economy but also make a meaningful contribution to preserving the financial strength of the UK for generations to come. With effective guardrails in place the excess capital in DB schemes could act as a bridge to the longer-term benefits that would be unlocked by reforms to LGPS and DC pensions.
"It would also mean DB schemes could continue in their role as natural long-term investors in the gilt market, which underpins the taxes we pay, the cost of doing business in the UK and the cost of mortgages."
Trustee confidence
LCP agreed DB surplus plans could not only boost the economy, but also generate tax revenue for the government on extracted surpluses.
But the consultancy said trustees would need to be confident that member benefits will not be put at risk – noting it remained to be seen what accompanying measures will be implemented to protect scheme members as well as what role trustees will take in permitting the release of any surplus.
LCP partner Steve Hodder said: "It is very welcome that the government is looking seriously at allowing greater flexibility for well-funded DB pension schemes. These schemes collectively offer vast potential to further support not only their own members and their sponsors, but also the UK economy.
"The key to success will be to ensure comprehensive protection of member benefits to give trustees the required confidence. One route which would ensure all well-funded schemes could access these new freedoms would be a 100% underpin from the Pension Protection Fund, subject to certain conditions. But time is of the essence, and the government needs to give a clear sign now to schemes that this is on the agenda, otherwise final decisions will be made and the opportunity will be missed."
Sackers partner Eleanor Daplyn was similarly positive but agreed "appropriate safeguards will be critical" – adding that "proper regard needs to be had to the existing law (legislation and the courts) around trustee duties".
She added any proposals also needed careful consideration. Daplyn explained: "History tells us that changes to pensions law usually turn out to be far more complicated than expected and that unintended consequences can abound – the removal of the lifetime allowance is a case in point. If reforms are to have the desired effect, they will need to be fully consulted on and due regard had to industry feedback. Otherwise, they could end up being too uncertain or risky for trustees or sponsors to use them."
Zedra managing director Kim Nash said the role of trustees would be crucial. She said: "A renewed focus on unlocking DB surpluses has the potential to encourage investment in UK businesses alongside the opportunity for members to benefit from surplus distribution as well.
"This may encourage employers to consider running on their schemes rather than passing their assets and any potential upside to an insurer. Members outcomes are key to the decision making and any surplus distribution will need careful consideration to ensure the security of members benefits are not put at risk. Trustees will have a key role to play in balancing the support that can be provided to employers and therefore the broader economy as well as protecting members from harm. Clearer processes will be helpful to opening these conversations and for schemes to consider the end objective.
