The government has confirmed plans to free up billions of pounds from defined benefit (DB) surpluses, with legislation to be introduced through the Pension Schemes Bill.
In an announcement today (21 May), the government cited figures from the Pensions Regulator and the Pension Protection Fund (PPF) indicating record levels of surplus funding in DB schemes.
It also confirmed that the rules would form part of the Pension Schemes Bill, expected to be introduced in parliament in the coming weeks. The government’s response to its consultation on surplus release will also be published in the next few weeks.
“Our plans will allow all schemes to safely [access surpluses], delivering greater investment across firms and benefits for savers.”
Torsten Bell, pensions minister
The announcement said the measures would allow trustees to “safely release” some surplus funds “to invest back into their businesses and unlock more money for pension scheme members”.
“The upcoming changes will focus on member protection, and trustees will continue to be required to fulfil their duties towards scheme beneficiaries,” the announcement said.
Torsten Bell, the pensions minister, said companies sponsoring DB schemes were already experiencing benefits through lower deficit recovery payments.
The Office for National Statistics’ (ONS) latest survey showed that £932m was paid into DB pension schemes in the third quarter of last year through deficit reduction contributions, significantly lower than the historical average.
“Fast falling deficit payments offer employers a cashflow boost of over £10bn a year, which can support higher wages and investment,” Bell said.
“And growing scheme surpluses can also be used productively. Currently, some trustees are held back from sharing the benefits of a surplus, but our plans will allow all schemes to safely do so, delivering greater investment across firms and benefits for savers.”
The PPF’s Purple Book data showed an aggregate surplus of almost £220bn across the private sector DB universe as of 31 March 2024, on a section 179 basis.
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Tax benefit for government from surplus release?
Jos Vermeulen, head of solution design at Insight Investment, pointed out that the government also stood to benefit from increased access to surpluses as it currently levies a 25% tax on any surplus capital extracted from a DB scheme.
He estimated that the government could raise as much as £40bn through this tax, depending on the uptake. This would dwarf the near-term impact of the Mansion House Accord, he argued.
Vermeulen also argued for the PPF to provide full protection for all member benefits, which he said would help give trustees reassurance over releasing surplus capital.
“This would likely increase the amount of surplus released and the associated benefits,” he said. “The costs and risks of doing so would be minimal, and insignificant when set against the potential positive impact of such action.”
Morten Nilsson, chief executive officer at Brightwell, said: “UK businesses have had full responsibility for the downside of their DB pension schemes but very limited access to the upside.
“Making it easier for surplus to be returned to sponsors as part of the upcoming Pension Schemes Bill will be welcome provided the right checks and balances are in place to protect members.”
