Keir Starmer and Rachel Reeves confirm DB surplus release plans

Hosting a meeting with leaders of some of Britain's biggest businesses in the City of London this morning (28 January), the prime minister and the chancellor outlined how restrictions around how well-funded DB schemes will be able to invest their surplus funds will be lifted.

The exact details of the surplus policy will be set out in the government's response to the Options for Defined Benefit Schemes consultation, which the Treasury said is due to be published this Spring.

The move follows speculation the government would announce plans to reform DB surplus rules yesterday (27 January) – proposals that were welcomed by the industry.

Prime minister Keir Starmer said: "The number one mission of my government is to secure growth, drive higher living standards for everyone, and get more money into people's pockets.

"To achieve the change our country needs requires nothing short of rewiring the economy. It needs creative reform, the removal of hurdles, and unrelenting focus. Whether it's how public services are run, regulation or pension rules, my government will not accept the status quo. Today's changes will unlock billions of investment, pushing forward in delivering my Plan for Change."

Chancellor Rachel Reeves added: "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."

The government said these reforms would build on the chancellor's Mansion House reforms to defined contribution schemes and the Local Government Pension Scheme (LGPS) announced last November.

It said around 75% of schemes are currently in surplus, worth a total of £160bn, but restrictions have meant that businesses have struggled to invest them.

Currently DB scheme surplus can only be accessed where schemes passed a resolution by 2016, so not all schemes can access surplus even if trustees and sponsors both want to do so.

The government said legislative changes could enable all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement.

It said such a move would allow trustees to assess the suite of options available in striking a deal with employers and potentially give businesses more flexibility – allowing trapped surplus funds to be invested into the wider UK economy, or given to scheme members as additional benefits.

Positive response

Pensions and Lifetime Saving Association director of policy and advocacy Zoe Alexander commented on the announcement. She said: "The PLSA backs surplus release, with the right protections in place to ensure member benefits are secure. Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers' defined contribution workplace schemes.

"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."

Investment Association director of policy, strategy and innovation Jonathan Lipkin agreed: "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."

Aon head of UK retirement policy Matthew Arends said the announcement marked a "seminal moment in UK pensions" as the government moves to allow refunds ahead of a pension scheme winding up.

He said: "It will, though, be critical to understand the details of the circumstances in which refunds are possible – certainly, the approval of the trustees appears to be necessary, which provides a mechanism to ensure member benefit security.

"Employers will no doubt welcome the apparent flexibility over the use of surplus, although it remains to be seen what share of refunds is reinvested in the UK economy."

LCP partner and former pensions minister Steve Webb said changes may need to go further to maximise potential gains to employers, members and the wider economy.

Webb said: "Ideally the government would go further and offer a way of guaranteeing member benefits, such as enhanced cover by the Pension Protection Fund, which would allow all surplus schemes to participate in this new option. We need something bigger and bolder to maximise the potential of these reforms."