Pensions - Articles - Focus on surplus extraction likely to have limited use

Surplus extraction unlikely to be often appropriate but still positive move. Minimum threshold and strong support for trustees necessary. Public sector consolidator model has merit but price of entry must be fair and must reach target market first. Government underwriting will be key to its success but presents risk in asking taxpayers to guarantee private sector DB pensions.

 Broadstone has responded to the Department for Work & Pensions (DWP) proposals for a public sector consolidator and the treatment of scheme surpluses.

 Broadstone welcomes the government’s interest in making it easier for schemes to pay out surplus assets as there are currently significant barriers to this. As funding levels improve, these need to be considered because the current rules can actively deter company investment in their schemes.

 However, Broadstone questions whether paying out surplus assets will arise, or be appropriate, that often. The majority of schemes appear unlikely to generate large enough surpluses in an ongoing scenario to make this worthwhile given generally lower risk investment strategies, continued running costs (which can be material for smaller schemes) and a desire to move towards end-game solutions.

 Many employers and trustees will be wary of materially re-risking their investments now given the risk of deficits re-emerging and with additional regulation looming.

 On the subject of a public sector consolidator, Broadstone believes the proposals have merit and that a public sector consolidator could help many pension schemes achieve their long term goals while ensuring that member benefits are secure.

 However, Broadstone recommends caution in some of the more ambitious aspects of the proposals such as including open schemes or those in deficit, encouraging the DWP to focus on well-funded schemes who are simply unattractive to the existing insurance market due to their small size or complexity.

 A challenge for the public sector consolidator will be setting a fair price of entry and ensuring it reaches its target market when realistically there will be practical limitations in the number of transactions that might be achieved in the first few years.

 A further key factor to the success or failure of any public sector consolidator will be the level of underwriting provided and how quickly it can achieve sufficient scale to run efficiently.

 Broadstone does not see any realistic option other than government backing to this project, although there is clearly political risk in asking tax payers to guarantee private sector defined benefit pensions. On the upside, the message that the government would be ensuring member benefits are secured is a positive one and consolidating scheme assets in this manner would enable the investment in productive finance that the Chancellor is looking for.

 Sarah Elwine, Actuarial Director at Broadstone, commented: "The idea of a public sector consolidator definitely has merit in increasing end-game options for schemes that are currently unattractive to commercial providers.

 “It has the additional benefits of increasing levels of investment in high-growth UK assets, a flagship government policy, and we recommend that careful thought is given to minimising potential market distortions, augmenting rather than disrupting the options available to trustees. Any consolidator will have to carefully balance the potential conflicts between these objectives and guaranteeing member security which must remain the priority.

 “It should also be noted that the landscape could change markedly between now and the mooted market entrance of a consolidator in late 2026.

 David Brooks, Head of Policy at Broadstone, added: “In terms of refunding surpluses, we understand there is a call for some schemes to lower barriers and ensure the scheme surpluses are not trapped as funding levels improve. However, to protect members, we would like to see strong support for trustees to guide decision making and prevent them facing undue pressure or criticism when considering this option.”

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