The government has confirmed plans to relax rules around defined benefit pension scheme surpluses, paving the way for excess funds to be paid out to members or employers.
In an announcement this morning, the Treasury stated that prime minister Sir Keir Starmer and chancellor Rachel Reeves would address business leaders today about their plans to “unlock” money in DB pension schemes.
Details of the government’s plans will be set out in a response to the Options for Defined Benefit Schemes consultation, which was launched by the previous administration. The response is expected in the spring.
The Treasury stated that trustees and the sponsoring employers could use money from surpluses to “increase the productivity of their businesses” through higher wages, or by paying more to pension scheme members.
It said: “Where trustees agree to share a portion of scheme surplus with a sponsoring employer, the employer may choose to invest these funds in their core business, for example to purchase equipment or supplies, and/or provide additional benefits to members of the pension scheme.”
Data from the Pensions Regulator (TPR) showed that private sector DB pension schemes had an aggregate funding surplus of £179bn as of 31 March 2023, on a technical provisions basis.
Protections for members needed
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Saving Association, said the trade body supported 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.”
Zoe Alexander, PLSA
“Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers’ defined contribution workplace schemes,” she said.
“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.”
TPR chief executive Nausicaa Delfas said: “Our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits.
“Where schemes are fully funded and there are protections in place for members, we support efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy.”
“Our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits.”
Nausicaa Delfas, TPR
The Treasury’s statement acknowledged that “trustees have an overarching fiduciary duty to act in the best interests of their members”.
“When considering surplus extraction, trustees must fund the scheme and invest its assets in a way that leads to members receiving their full benefits,” it said.
The economic growth agenda
Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association – the asset management industry trade body – said: “Unlocking surplus capital from defined benefit schemes has the potential to both boost UK growth by opening up investment opportunities for companies and their stakeholders, as well as the possibility of higher pensions for scheme members…
“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.”
The prime minister said achieving his economic growth plans “requires nothing short of rewiring the economy”.
“It needs creative reform, the removal of hurdles, and unrelenting focus,” he said. “Whether it’s how public services are run, regulation or pension rules, my government will not accept the status quo.”
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.”
