Investment - Articles - Reaction to DB scheme surplus reforms in Autumn Statement

LCP, XPS pensions Group and TPT Retirement Solutions comment as the Government announce they will be consulting this winter on whether changes to rules around when DB scheme surpluses can be repaid, including new mechanisms to protect members, could incentivise investment by well-funded schemes in assets with higher returns and reducing the authorised surplus payments charge from 35% to 25% from 6 April 2024

 The Chancellor has announced plans to consult on the details of how more Defined Benefit pension schemes could invest for growth, building up a larger surplus, and sharing the fruits of this surplus with the employer who stands behind the scheme. As part of this announcement, the Treasury has indicated that the current 35% tax rate on extracted surplus funds will be reduced to 25%.

 LCP has argued that more relaxed rules on surplus extraction need to be accompanied by greater member security. This would be by means of 100% cover from the Pensions Protection Fund, financed by a ‘super levy’ on the employers who opted in to this new regime.

 The idea of a 100% PPF underpin is expected to be included in the forthcoming consultation document.
 With trustees assured that member benefits are fully protected, well funded schemes would be able to take on an appropriately increased level of investment risk, generating larger surpluses which could benefit existing DB members (through discretionary increases), the DC generation (through use of surplus funds) and the sponsoring employer. In addition, freeing up funds for employers and investing for growth would be of benefit to the wider UK economy, including helping to fund goals such as the transition to Net Zero.

 Commenting, LCP partner Steve Webb said: “Today’s announcement represents a huge leap forward in plans to allow well-funded DB schemes to invest for growth. Provided that member benefits are protected, schemes would be able to build up surplus funds, benefiting existing members, the next generation of pension savers and the sponsoring employer. Rather than risk ‘wasting’ the potential of over £1 trillion of assets which have been painstakingly built up over decades, this new regime would be a win for members and sponsors alike. And the announcement of a lower rate of tax on extracted surpluses is a clear sign that the Treasury is serious about these plans. We look forward to seeing the consultation on the details of how this new regime will work and encourage all well-funded schemes to include the option of running on when deciding on their end game strategy”


 Reacting to the announced reforms, Simeon Willis, Chief Investment Officer at XPS Pensions Group, said: “The political nudge required to redirect defined benefit schemes from their current de-risking path needed to be massive. In that respect this package of measures represents a missed opportunity. With further consultations launched, the window of opportunity to implement material changes to create benefits for members and the UK economy before the end of the current Parliament is quickly closing.”

 Wayne Segers, Partner at XPS Pensions Group, said: “We welcome the Government’s plan to introduce measures to allow DB pensions schemes to access surplus. But given many schemes are already in surplus, the industry needs clear rules now that provide a structure for trustees and employers to run their schemes on and to safely build up and release surplus. Employers could then be allowed to access these funds, provided they use them to reinvest in their UK operations or boost the pension savings of other employees in DC schemes.”  


 Nicholas Clapp, Business Development Director at TPT Retirement Solutions, comments: “The proposal to make it easier for sponsoring employers to access scheme surpluses could be hugely beneficial. Releasing this capital for business investment could fuel economic growth. These reforms also create an incentive for schemes to run on, serving as an alternative solution to an insurer buyout. This could benefit trustees, sponsors and pension scheme members by providing more endgame options.” 

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