Stay informed with free updates
Simply sign up to the Pensions industry myFT Digest — delivered directly to your inbox.
Experts have welcomed government plans to ease companies’ access to surplus savings trapped in defined benefit pension schemes, a move ministers hope will release billions of pounds for investment in corporate Britain.
On Thursday, the government said it was considering lowering the threshold at which defined benefit scheme trustees can share assets in excess of pensions owed from the price an insurer would pay to take over the fund to a less stringent measure.
The Department for Work and Pensions said it would consult on reducing the threshold to the “low dependency funding” basis, which the industry regulator estimates has £160bn of surplus.
On a buyout basis that surplus falls to £68bn, according to calculations by the Pension Protection Fund’s Purple book.
“They’ve gone for the bolder approach which I think is right given there’s already such a high degree of caution in the pensions system today,” said Steve Hodder, consultant at LCP.
Iain McLellan, director at consulting firm Isio, said the proposals marked “a significant shift in [defined benefit] scheme regulation” and that the industry was keen to “embrace these changes and the opportunity to support growth and greater innovation”.
The UK’s £1.2tn corporate defined benefit pension system, which is largely closed to new members, has improved its funding levels in recent years after a rapid rise in government borrowing costs boosted their expected returns.
“We are minded to legislate to replace the existing buyout threshold for surplus extraction with a new threshold set at full funding on the low dependency funding basis,” the government said in response to a consultation launched last year.
DWP also said it would introduce a statutory power for trustees to modify their scheme rules to provide for surplus sharing where existing rules do not allow for it.
The government said any decision to extract surplus from a scheme would remain with trustees. It ruled out the possibility of granting 100 per cent cover from the Pension Protection Fund for scheme sponsors that are unable to meet their obligations, to remove any incentive to take undue risk.
The Pensions and Lifetime Savings Association trade group said the measures meant “surplus release by schemes could provide an opportunity to improve member benefits, boost [defined contribution] pension contributions, and support new types of investment, with appropriate saver protections”.
More details will be laid out in the pensions bill, expected to be published next month.
The bill will also legislate for measures outlined in the pensions investment review published on Thursday, including plans to consolidate defined contribution workplace schemes into a series of “megafunds” of at least £25bn by 2030.
However, the government has made some provision for successful smaller schemes with a “transition pathway” to allow them to reach scale, provided they have a “credible plan” to grow to £25bn by 2035.
Ministers will also provide a “new entrant pathway” to encourage market innovation and allow for the creation of more multi-employer collective defined contribution pension schemes.
Paul Kitson, UK pensions leader at EY, said the plans were “ambitious yet realistic” and that care would be needed “to avoid unintended consequences, from a reduction in competition, to the risk of eliminating smaller but well performing providers”.
Pensions minister Torsten Bell said he would “shortly” launch the second phase of the pension review, focused on retirement adequacy, which is expected to look at auto-enrolment and the amount people pay into long-term savings funds.
