An official estimate from the Department of Work and Pensions (DWP) has put the amount likely to be released from defined benefit surpluses at £11bn – less than 10% of the government’s main figure cited when the Pension Schemes Bill was introduced to parliament.
The bill contains measures that would allow trustees, in certain circumstances, to release excess capital from fully funded defined benefit (DB) pension schemes.
When announcing the bill in June, the government’s press release stated that the new legislation would bring “increased flexibility for DB pension schemes to safely release surplus worth collectively £160bn, to support employers’ investment plans and to benefit scheme members”.
This was based on data from the Pensions Regulator (TPR) detailing the estimated aggregate funding position of DB schemes on a “low dependency” basis.
However, in a paper on surplus release published this week, the Society of Pension Professionals (SPP) cited a DWP impact assessment of the bill, which estimated £11.2bn in surplus would be released over 10 years.
The DWP added that this figure was “highly uncertain” due to the range of options available to trustee boards, and the continued strong preference for buyout shown in industry surveys.
The government currently levies a 25% tax on any surplus extracted from a DB scheme. This implies a tax income for the Treasury of £2.8bn over 10 years if the impact assessment’s estimate is correct.
Surplus release: Considerable considerations
In its wide-ranging paper, the SPP set out risks, consequences, and other issues that may affect members and employers when trustee boards explore surplus release.
“The prevailing approach of trying to eliminate or transfer all risk will need to be replaced with one that strives for an optimal balance between risk and reward.”
The Society of Pension Professionals
These include the impact of covenant, hedging and investment considerations, communications with members, fairness across cohorts and age groups, and regulatory capacity to oversee surplus release.
The SPP also explored broader effects on the DB sector, including marketing by proponents of different endgame solutions and regulatory capacity.
“Firms and regulators will need to apply greater scrutiny to endgame strategies, ensuring that decisions are made in the best interests of beneficiaries – both members and employers – and that promotional material from both the run-on and insurance camps is fair and not misleading,” the SPP’s report stated.
“More DB schemes operating for longer will increase the time horizon for the regulation of DB schemes, extending beyond the limited number of schemes that are still open, which could have resource implications for TPR and perhaps DWP.”
A cultural shift ahead?
The society also contended that “a cultural shift” may be necessary to encourage surplus release to be considered.
“The prevailing approach of trying to eliminate or transfer all risk will need to be replaced with one that strives for an optimal balance between risk and reward,” the SPP argued.
“A renewed focus on wealth creation, rather than just wealth protection, could lead to better outcomes for all stakeholders, but achieving this will require a change in mindset.
“An infusion of skills and perspectives from the wider financial services industry may prove beneficial to complement the established capabilities of pension professionals.”
Alex Beecraft, a member of the SPP’s Covenant Committee and chair of the society’s working group on surplus release, said: “While the factors that drive decisions on surplus release will vary from scheme to scheme, the core themes are simply those that trustees, employers and advisers have considered over the last decade to reduce risks for members.
“This should provide confidence that in the right situations the associated risks can be managed, monitored, and mitigated to improve outcomes for all stakeholders.”
