Think tank calls for full PPF underpin to boost surplus release case

The Social Market Foundation, a think tank, has called for the change to give DB pension scheme trustees confidence that they can invest to maximise surpluses for the benefit of members and employers.

The government is due to announce its plans for freeing up DB scheme surpluses later this year. According to the Pensions Regulator, UK private sector DB schemes were 120% funded on aggregate on a technical provisions basis as of 30 September 2024.

In its report, the Social Market Foundation said that, by providing a 100% underpin, the PPF could “reassure trustees that even if surplus assets are released, members’ benefits would continue to be protected”.

“This would serve to safeguard the pensions of millions of people, and also support the success of the government’s surplus release policy,” the foundation said.

It also advocated for surpluses to be released “slowly”, which the foundation argued would allow trustees to monitor the implications of any payments and adjust their approaches accordingly.

Pension schemes looking to release surplus should be at least fully funded on a low dependency basis, the Social Market Foundation contended, as this was “a prudent threshold”.

“It is crucial that this is only set as a minimum threshold, with trustees able to retain more assets in a fund if they wish to do so,” the foundation said.

Allowing surplus release could encourage more DB pension schemes to run on for longer, the report said, which would in turn increase the potential appetite for long-term assets.

However, the foundation also urged the government to develop other measures to ensure schemes had a strong pipeline of investable assets.

Achieving an optimal outcome

Gideon Salutin, senior researcher at the Social Market Foundation, said: “Defined benefit pensions are being held back by a system that was built to minimise risk. Going forward, they could support a more dynamic and productive economy while protecting the security for their members.

“Our report provides a roadmap to government to ensure the release of pension surpluses is as smooth as possible – as well as making suggestions to ensure Britain makes the most of this initiative and benefits from the support of domestic pension funds for years to come.”

Jos Vermeulen, head of solution design at Insight Investment, said allowing surplus release would “offer sponsors and members a meaningful financial boost while retaining pension security”.

He added that increased protection from the PPF would help the government “achieve an optimal outcome for pension scheme members, employers, and the UK”.

“The proposals need to be very carefully considered, with industry fully engaged and consulted, to ensure an appropriate balance is maintained.”

Chris Ramsey, Society of Pension Professionals

Chris Ramsey, chair of the Society of Pension Professionals’ DB committee, said his organisation was supportive of surplus release “provided there are appropriate safeguards for members”.

“Returning surplus could not only boost employers, but also be in members’ interests if the surplus is shared with them, and can support the UK economy,” he said.

“Nevertheless, both the government proposals and the Social Market Foundation’s recommendations, published today, carry inherent risk. Any extraction of surplus could reduce the security of pension scheme member benefits.

“As a result, the proposals need to be very carefully considered, with industry fully engaged and consulted, to ensure an appropriate balance is maintained.”