More safeguards are needed before surplus capital can be released from overfunded defined benefit (DB) pension schemes, according to industry experts.
With the government’s consultation on draft rules closing next week, providers and trade bodies have been forthright in their views on the plans, with many changes urged to ensure fairness and mitigate conflicts of interest.
The Department for Work and Pensions (DWP) has proposed low dependency as the funding basis for surplus release, meaning that schemes funded above this threshold would be able to pay back capital to sponsors or members.
However, in its response to the consultation, XPS Group has urged the department to make it clear that low dependency must be a long-term reality and that trustees must ensure that protections are in place if the scheme’s funding position deteriorates.
Wayne Segers, head of pension solutions at XPS Group, said: “Linking surplus to low dependency is logical but low dependency valuations are new, and market best practice is still emerging. Only time will tell if the market managed to set the bar at the right level.
“The surplus rules need to recognise this uncertainty. We are asking for the regulations to give trustees more structure around their decision-making, helping to safeguard against poor outcomes undermining confidence in the wider surplus regime.”
“The framework should make it straightforward for trustees to take a more cautious approach where circumstances change, rather than requiring them to repeat an otherwise unnecessary process.”
Rulebook must protect long-term funding
Louise Davey, a trustee director and head of policy and external affairs at Independent Governance Group, argued that surplus “should not simply be viewed as a windfall”, and echoed the call for a long-term approach to surplus release.
She explained: “It is the product of a funding and investment strategy that needs to remain resilient over the long term. It can disappear if conditions change. The security of members’ benefits must remain the starting point.
“Low dependency provides a sensible minimum threshold, but meeting it shouldn’t automatically mean surplus is available to use. Our own research suggests sponsors recognise that caution too, with two-thirds favouring a buffer above the legal minimum before surplus is used.”
Surplus is not a windfall – it is a governance test
In this article for Pensions Expert, Louise Davey of Independent Governance Group explores the nuances and pressures of defined benefit scheme surpluses, and why strong and clear governance processes are essential. Read the full article.
The Association of Consulting Actuaries (ACA) and the Society of Pension Professionals (SPP) have both recommended changes to the draft regulations that would support ongoing regular surplus release arrangements, as well as one-off payments.
Chintan Gandhi, chair of the ACA, said: “Surplus release decisions may need to respond to changing market and funding conditions. The framework should make it straightforward for trustees to take a more cautious approach where circumstances change, rather than requiring them to repeat an otherwise unnecessary process.
“We would also like the regulations to make phased surplus release a genuinely practical option. A single member notification should be capable of setting out an appropriate series of payments, with each individual payment still subject to the necessary actuarial certification.”
Last week, the SPP said the current wording of the rulebook was skewed towards one-off payments and could make it difficult for schemes that want to ‘run on’ and make regular payments to members or sponsoring employers.
