In one of the biggest changes to the rules for defined benefit schemes in years, trustees will soon be allowed to relax rules around releasing surpluses. Bina Mistry of the Society of Pension Professionals explains how this could work.
At the end of May, the government published its response to the ‘Options for Defined Benefit Schemes’ consultation. Responding to a consultation that it inherited rather than consulting afresh allowed measures to be included in the Pension Schemes Bill that was presented to parliament a week later.
Torsten Bell, the pensions minister, had already said that the Pension Schemes Bill would not include everything, and the Pension Protection Fund’s hopes of managing a public sector consolidator were duly disappointed – at least for now.
“Each change could prove pivotal. But much depends on how schemes respond, and on details yet to be finalised.”
Bina Mistry, SPP
Legislation governing access to DB surpluses did make the cut. It sits alongside a permanent regulatory regime for commercial superfunds, whose place in the bill was never in doubt.
Each change could prove pivotal. But much depends on how schemes respond, and on details yet to be finalised.
On surpluses, the bill would enable trustees to grant themselves the power to make payments to an employer. Restrictions around any existing powers could also be relaxed.
This is in addition to repealing the requirement for pension schemes to have passed a surplus release resolution by 2016 if they wanted to preserve it. The Society of Pension Professionals (SPP) had warned that just making the latter change would not be enough because not all schemes had such a power to begin with. Going beyond this is a major positive step.
Beneficiaries and thresholds
Also proposed for repeal is the requirement that schemes not winding up can only make payments to the employer where trustees are satisfied that this is in the members’ interests.
The government says this change is to “clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries”, which therefore has the potential to bring employers’ interests into the debate.
The Pension Schemes Bill will not restrict how released surplus can be used, nor how funds may be shared between the employer and scheme members. However, the government has said the potential for members to benefit is “central” to the policy’s success. Guidance is promised.
In the meantime, the Pensions Regulator says it expects trustees to “have plans ready for how they would respond” to requests from the sponsor.
Finally, the government is “minded” to reduce the funding threshold for making payments to an employer, from 100% on a buyout basis to 100% on a low dependency basis. However, this will not be nailed down through regulations until 2027, with the changes intended to come into force together by the end of that year.
Moving to 100% of low dependency liabilities would be a lower threshold than the previous government had hinted at introducing, but it would only be a floor.
The government’s impact assessment assumes only £11bn of additional surplus release over 10 years, despite its press releases trumpeting that “up to £160bn” (an estimate of the aggregate low dependency surplus) could be “unlocked”.
Ultimately, the effect will come down to what happens in practice as sponsors and trustees evaluate their options, but the proposed changes should, in combination, move the dial and increase the number of schemes running on in pursuit of shared upside, while accepting some modest risks.
Superfund changes – massive or just meaningful?
With regards to the superfund measures, the new regime could be a massive development or merely a meaningful one.
The Pension Schemes Bill says that superfund transactions (intended to be cheaper but less secure than buyout) cannot proceed if the scheme can afford to buy out. It does not include the second part of the current gateway test – that buyout should also be unrealistic in the foreseeable future.
That would be a big change, making around half of DB pension schemes potentially eligible, subject to transfers being assessed to improve the chance of members getting full benefits.
However, the bill allows the government to change this “onboarding condition”. The impact assessment says the intention is not to open up an alternative to buyout for schemes that could get there within five years by themselves, and assumes that only £20bn of liabilities will transfer within a decade.
Whatever the outcome, a more stable regime for superfunds – once rules are in place from 2028 – is needed.
Bina Mistry is a member of the Society of Pension Professionals.