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Pension trustees warn that allowing companies to access surpluses trapped in defined benefit pension schemes is unlikely to deliver the jolt to the economy that the government hopes for.
The UK government said this week that lifting the restrictions on companies using money from their DB pension schemes — in excess of what they owe members — would “unlock billions to drive growth”.
According to an FT analysis of company accounts there are over 30 companies in the FTSE 100 with DB schemes with surpluses of at least £100mn and a funding ratio of at least 110 per cent. Most declined to comment when contacted by the FT.
Energy company SSE said it was looking at the opportunities the reforms represent, but noted any impact would be relatively small.
Schroders said after the announcement its would use ‘’approximately 10 per cent’’ of its scheme’s DB section’s surplus per year to support funding for defined contribution members.
Most schemes can already access surpluses in their DB schemes, provided they passed a resolution in 2016 permitting them to do so, according to pensions consultant LCP. But in practice few do.
Only £180mn of surplus was accessed by companies between 2018 to 2023, according to government estimates last year. Any surplus extracted is taxed at a rate of 25 per cent, having been lowered from 35 per cent last year.
Where DB and DC pension funds are set up within the same trust, DB surpluses can be transferred to DC members if the scheme rules permit it without incurring a tax charge.
Trade groups have broadly welcomed the government’s proposals, provided appropriate guardrails are in place to protect members, but trustees have privately expressed doubts.
“Why would I want to give away my comfort blanket?” said one trustee of a FTSE 100 company pension scheme. He was sceptical that he would be prepared to release its surplus to executives, noting that for many years the scheme was in deficit and a fall in government bond yields could make its funding position more vulnerable.
“It’s not going to be the silver bullet that the government hopes for,” said another, adding that the total DB scheme surplus was only about £68bn on a buyout basis — the level at which companies with the right permissions can access their surpluses.
“First you have to work out how much to give members, then you have to agree how much to give the company factoring you will have to pay 25 per cent tax,” he said, adding that the time it takes to make these decisions was also “not trivial”.
Rob Gardner, former co-chief executive of pensions consultancy Redington and founder of Rebalance Earth, a flood mitigation investor, said if he were a trustee weighing the return of a surplus to an employer there would be “significant challenges”.
“My fiduciary duty is to act in the best interests of members, and the potential long-term risks to them may outweigh the short-term benefits to the employer,” he said.
The government estimates that around 75 per cent of the UK’s £1.2tn defined benefit corporate pension schemes are in surplus, worth a total of around £160bn. Some 96 per cent of these schemes — which provide pensions to 8.8mn people — are closed to new members.
Ministers have been working out how to extract money from DB schemes after a rapid rise in interest rates radically improved scheme funding levels in 2022. The government’s plans follow a consultation by the Conservative government last spring.
Policymakers also hope trustees will be emboldened to invest in more risky assets, rather than preparing schemes to be sold to insurance companies in a process known as buyout.
But Sankar Mahalingham, managing director at professional trustee firm Law Debenture, said it was “unlikely that there will be a large number who will suddenly take a very different look at their investment strategy”.
According to the Pension Protection Fund, schemes had a net deficit on a buyout basis of almost £500bn as recently as 2019. That figure is now a surplus of £68bn.
When the Financial Times asked the Treasury if it would lower the ‘buyout basis’ threshold, a spokesperson said that “schemes will continue to have to satisfy stringent funding requirements to be eligible to extract surplus”.
The previous government’s consultation explored enhancing protection from the Pension Protection Fund to 100 per cent to encourage trustees to be more comfortable with taking on more risk and releasing surpluses, as well as assessing if the tax rate for tapping surpluses should be lowered.
The Treasury told the FT it would set out these details “in the spring”.
