Katie Lightstone, Pensions Partner at PwC said: “Today’s response lays the foundations for major changes to defined benefit pension schemes in the UK. Striking the right balance between member security and supporting UK growth will be crucial. We expect many trustees will be focussed on the ‘grey area’ where the funding position is reduced from ‘nearly at buy-out' to low dependency as this could mean members don't get full benefits if there's an insolvency of the employer. Contingent assets with genuine value in an insolvency could enable surplus release while protecting against this risk. Assessments of the sponsor’s 'reliability’ and ‘longevity’ periods as part of the new Funding Code framework will form a helpful input into such decisions – and any surplus release will need to be consistent with the long-term strategy submitted in schemes’ first Statement of Strategy. We’re already seeing corporates and other stakeholders looking at pension schemes through a fresh lens – as a source of economic value and a potential source of capital. There could be a real impact on the economics of some deals or restructuring situations as a result of these changes. It will also be interesting to see how the new legislation interacts with the Pensions Regulator’s existing anti-avoidance powers and how to ensure there’s no potential for the new override to be mis-interpreted as ‘mismanagement’ of pension schemes.” Saye Mkangama, Pensions Partner at PwC added: As with all UK DB pension schemes, the impact will vary — but in some cases, we estimate that up to 25% of scheme assets could be made available for release over time. That’s a material shift. This level of change will require a fundamental evolution in how pension schemes are managed. Trustees and sponsors will need to adopt a more dynamic view of risk appetite, sponsor covenant strength, and how surplus can be used safely. That means a tax-efficient, risk-informed strategy, underpinned by best practice governance, clear contingency plans, and member security at the centre of every decision.”
Richard Wellard, Head of Corporate DB, Hymans Robertson says: “The government’s intention to use a low dependency funding level, as outlined in today’s DWP consultation outcome, as the threshold for sharing surplus with employers provides the perfect opportunity for tailoring and flexibility. However, it does have some material knock-on implications. The Pensions Regulator (TPR) currently oversees the low dependency basis set by trustees for defining when contributions need to be paid into the scheme. Opining on the level at which scheme funds can be paid out, and back to the employer, will be an entirely new direction for TPR. Time will tell how comfortable and straightforward this will be. Another consideration following today’s update is that the surplus sharing rules for superfunds will be different to surplus sharing rules for all other pension schemes. The detail is yet to be announced, but if pensions schemes will be able to share surplus at a lower funding level than superfunds, there will naturally be a lot of scrutiny around the precise definition of a superfund.”
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