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There is no magic money tree. So the growth-starved UK government is scrabbling around for any cash lying unused in the system which might be put to productive use.
The latest instalment is Prime Minister Sir Keir Starmer’s push to tap some of the estimated £160bn of “surplus” held in traditional corporate defined benefit pension schemes.
The idea is to make it easier for trustees to unlock this pot. Excess funds, the government hopes, could flow back to companies for growth investments, to scheme members to increase spending, or even stay in the pension fund but go into higher risk assets such as equities or illiquids.
This reform has been a long time coming, but there is a risk the money is not used as Starmer intends.
Former chancellor Jeremy Hunt recognised the potential held within roughly 5,000 UK corporate defined benefit pension schemes. Thanks to market conditions in recent years, the government estimates 75 per cent of these now hold assets in excess of the benefits they owe their members. About £68bn of the £160bn current estimated surplus exceeds a level businesses would need to sell their scheme to an insurer.
One reason the government is so keen on surplus cash being invested for growth is that scheme assets rarely are. In the past two decades, amid various regulatory changes, risk-averse trustees have shifted away from equities into bonds. In 2024, the proportion of DB schemes’ investments in bonds was 70 per cent; in 2006 this was just 28 per cent, the Pension Protection Fund says.
It is obvious that surplus cash, at the very least, could be used more productively, although rules around which schemes should be eligible will need to be watertight. The security of members’ benefits must remain the priority.
Whether allowing pension trustees to unlock funds will actually translate into growth, however, is a different matter.
Being allowed to do something is not the same thing as doing it. “Why do it?” is still the main question trustees have been asking this week, pensions consultants say. Indeed, they may prefer to sell out altogether. Bulk annuity deals have reached record levels, as companies opt to sell their pension schemes to insurers, which take over responsibility for payment to members.
Even if the money does become available, there may not be obvious places to put it. Companies could easily decide to return funds to shareholders, a proportion of which will inevitably be based overseas. It would be hard to be prescriptive about how funds are used.
Clearly, the next best thing to a magic money tree won’t be straightforward to climb. Still, even conquering the first few branches would be a good start.
nathalie.thomas@ft.com
