Billions of pounds of surplus in defined benefit (DB) pension schemes could be invested in the wider economy as the government sets out how restrictions will be lifted.
In a meeting with business leaders this week, prime minister Keir Stamer and Chancellor Rachel Reeves (pictured above) outlined how well-funded, occupational DB pension funds that are performing well will be able to invest their surplus funds. Currently, surpluses in DB funds can only be accessed where schemes passed a resolution before 2016, so not all schemes can access their surplus, even if both trustees and sponsors want to do so.
Legislative changes could enable all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement. This would allow trustees to assess the suite of options available in striking a deal with employers on how best scheme members can also benefit, linked to improving member outcomes.
Sir Keir Starmer said: “The number one mission of my government is to secure growth, drive higher living standards for everyone, and get more money into people’s pockets. To achieve the change our country needs requires nothing short of rewiring the economy. It needs creative reform, the removal of hurdles, and unrelenting focus. Whether it’s how public services are run, regulation or pension rules, my government will not accept the status quo. Today’s changes will unlock billions of investment, pushing forward in delivering my Plan for Change.”
Pension trustees and sponsoring employers could use surplus funds to increase the productivity of their business, to boost wages and drive growth or unlock more money for pension scheme members. Where DB pension scheme trustees agree to share a portion of the surplus with a sponsoring employer, the employer may choose to invest these funds in its core business, for example, to purchase equipment or supplies, and/or provide additional benefits to members of the pension scheme.
The reforms build on Reeves’ Mansion House reforms to create pension megafunds as part of the biggest set of pension reforms in decades, unlocking billions of pounds of investment in businesses, infrastructure and local projects.
Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association, said: “Unlocking surplus capital from DB schemes has the potential to both boost UK growth by opening up investment opportunities for companies and their stakeholders, as well as the possibility of higher pensions for scheme members. With around £1.1 trillion in assets, DB schemes already make a significant contribution to the funding of the UK economy and public services. With the right guardrails in place, the government’s proposals could help channel more funding into the economy, by enabling schemes to invest more widely and take on greater risk, while allowing for members to receive an uplift to pension benefits.”
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Saving Association (PLSA), said: “The PLSA backs surplus release, with the right protections in place to ensure member benefits are secure. Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers’ defined contribution (DC) workplace schemes. Lowering the legislative threshold for allowing returns of surplus could potentially encourage trustees, in conjunction with their employers, to adopt a more ambitious mindset and take on slightly riskier investment strategies for their DB assets, including greater investment in UK assets.”
The government will set out the details of the DB surplus policy in its response to the Options for Defined Benefits consultation, due in the Spring.