Reaction: DWP plans to free up DB scheme surpluses

The government has proposed a “statutory override” to allow trustees greater flexibility on how they use any defined benefit (DB) scheme surplus.

The proposal – made in a consultation paper released on Friday – also explores how to make it easier for trustees to make one-off payments to members by adjusting tax rules.

Pensions Expert spoke to legal experts last week on the potential implications of accessing surpluses, ahead of the consultation’s publication. Here, we summarise the initial reaction to the government’s proposals.

Former pensions minister Sir Steve Webb, partner at LCP, said the new flexibilities would only work if they are accompanied by a new underpin from the Pension Protection Fund (PPF).

He said the statutory override concept was a “very positive” suggestion, but added: “We do not believe many trustees would be reassured if the only safeguard for members before money could be taken out was that the scheme was currently well funded.

“Our proposal for full PPF cover, backed by a new PPF ‘super-levy’, would give trustees comfort that member benefits were fully protected regardless of what happened to the sponsoring employer in future, and could free up many billions of pounds of DB pension scheme assets to be invested more productively.”

Putting members first

Others, meanwhile, highlighted the importance of focusing on members rather than potential new investment opportunities.

Hetty Hughes, manager of long-term savings at the Association of British Insurers, said: “The central purpose of DB pension schemes – to pay the benefits promised to members – should not be undermined. Only over the last five years has the conversation around DB pensions shifted from tackling deficits to dealing with surpluses. If we see fluctuations in asset values, this could reverse again, so caution must be taken.”

Harus Rai, chair of the Association for Professional Pension Trustees (APPT), said: “The APPT will be consulting with members of the association on the questions posed within this important consultation.

“Professional trustees and lay trustees will want to ensure that any extraction of surplus does not materially undermine the ability of individual schemes to meet the pension benefits promised by those schemes – that will be a key consideration when considering the options posed in the consultation.”

Rai added that the APPT “may be supportive” of further guidance being brought in through the next iteration of the Pensions Regulator’s DB funding code.

Steven Taylor, chair of the Association of Consulting Actuaries (ACA), said: “We believe the right questions are being asked, for example around possible overrides to scheme rules where they are currently a barrier to efficient outcomes.

“However, under any approach, we will want to see that there is the flexibility available to sponsors and trustees to make decisions that best suit their scheme-specific situations and protect savers. A key consideration must be that members’ benefits remain suitably protected while clarifying for all schemes the pathways that are available to allow for surplus extraction where this is appropriate.”

Kerry McDermott, client director at Vidett and a trustee of three small DB schemes, said: “While there is no reason the £1.4trn in assets the DWP estimates is held in these schemes cannot be used more productively, this needs to be considered on a scheme-by-scheme basis.

“Changes to the tax on surplus already scheduled may be helpful , along with looking at accounting impact and valuation methodology. Communication and understanding of all options is always key.

“Pension schemes, of course, are not responsible for propping up the UK finance industry, and securing members’ benefits must always be first and foremost in our minds.”