Chancellor expected to loosen rules on DB surpluses [updated]

Sky News and the Financial Times have both reported over the weekend that Reeves is expected to target DB pension schemes and loosen the rules around surpluses.

This was subsequently confirmed on Tuesday (28 January) in a statement from HM Treasury and the prime minister.

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.

A ‘fundamental change’ for DB schemes

Morten Nilsson, CEO at Brightwell, the manager of the £36.6bn BT Pension Scheme, said: “This reform has the potential to fundamentally change the way employers view their defined benefit pension schemes, transforming them from liabilities to offload into valuable assets worth running on for the longer term.

“To be successful, clear guidance for trustees would be needed to define who decides whether a payment is made, when it’s made, and the size.

“Done carefully, we believe that these changes would not only benefit employers and members but also support the UK economy.”

Steve Hodder, a partner at consultancy group LCP, has been involved with industry-wide discussions on surplus issues. He said any proposals would need to “ensure comprehensive protection of member benefits”.

“One route that would ensure all well-funded schemes could access these new freedoms would be a 100% underpin from the Pension Protection Fund, subject to certain conditions,” Hodder added.

“But time is of the essence, and the government needs to give a clear sign now to schemes that this is on the agenda, otherwise final decisions will be made and the opportunity will be missed.”

Going for growth

Ashish Patel, a managing director at investment bank Houlihan Lokey, said freeing up surpluses could allow DB pension schemes to access “the profound and accelerating growth of private capital markets”.

“Increasing the ability of pension plans to gain exposure to private assets will bring the UK closer to some of the best-performing pension fund investors, including those in the US and Canada, mirroring the direction of travel within these large, successful growth markets,” he said.

“In the context of an ageing population, encouraging pension plan trustees to be more ambitious with their investments will hopefully make DB pension plans more sustainable in the long-term, while giving UK innovators the boost they need, and deserve.”

However, Dominic Thackray, an independent financial adviser at accountancy firm MHA, argued that if trustees and pension managers believed in the investment case for UK assets “the money would already be there”.

“If there was more of a push from the government to create a more attractive growth environment for UK businesses, investments would naturally follow, rather than forcing investments that could have a detrimental impact on returns,” he said.

Statutory override option

The previous government launched a consultation last year about giving trustees a ‘statutory override’ on surplus rules to allow money to be returned to members or sponsors.;

Despite widespread support for the move, the new government did not include DB pension schemes in its Pensions Review, which instead focused on the Local Government Pension Scheme and the defined contribution sector.

Parliament’s Work and Pensions Committee also recommended that the government look at ways to ensure that surpluses can be used to grant increases to benefits accrued prior to 1997. These are not subject to statutory inflation-linked increases.

However, some lawyers have warned that any changes to surplus rules need to be carefully considered as they are not permanent, and pension schemes can fall into deficit if financial markets move against them.