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Chancellor Rachel Reeves is looking to free up billions of pounds from the UK’s £1.2tn defined benefit pension system in her latest attempt to kick-start growth.
The government is preparing to allow companies to access scheme surpluses — estimated to be worth around £100bn — to encourage them to invest in more risky assets, according to people briefed on the chancellor’s thinking.
“The devil is in the detail but we are positively inclined,” said one government insider.
The Treasury declined to comment on the discussions — first reported by Sky News — but City sources said Varun Chandra, Sir Keir Starmer’s top business adviser, had discussed the possibility of using so-called surplus to boost the economy.
A shift in focus to DB schemes comes as the chancellor is gearing up for her growth speech on Wednesday. Pension experts estimate allowing companies to access scheme surpluses could unlock up to £100bn for investment.
The government had previously focused its pensions review on consolidating defined contribution (DC) and local authority pension assets. A review into pensions adequacy — which the government had hoped would drive more investment into the UK — has been delayed indefinitely.
In an interview with the Financial Times in November, former pensions minister Emma Reynolds said she had prioritised reforming DC workplace schemes because that was “where the growth is”.
She pointed out the majority of corporate DB pension schemes were closed to new members and “naturally had a less long time frame” as schemes move into less risky assets as they wind down or sell their pension obligations to an insurance company.
However, industry insiders said a radical improvement in the funding position of DB pension schemes in recent years following a rise in government bond yields meant many were now in a position to take on more risk, if the rules enabled companies and scheme members to benefit from it.
“The reason the government announcements have been about DC and the Local Government Pension Scheme is because they’ve not really understood DB and think it’s too big to touch . . . but the implications of not touching it are worse for the government and I think they realise it now,” said the chair of a multibillion pound DB pension scheme.
David Lane, chief executive officer at TPT Retirement Solutions which manages DB and DC pensions, said allowing companies to access scheme surpluses was “likely to be a more effective way of channelling pension assets in to the UK economy than some of the consolidation initiatives that have been announced . . . it’s direct if the employer reinvests that money into its business”.
Access to scheme surpluses could slow the pace at which pension funds have been offloading their pension obligations to insurance companies, with around £50bn of assets transferred in so-called bulk annuity transactions in each of the past two years, according to pensions consultancy WTW.
Halting this trend could help support UK government bond and equity markets in the longer term because insurance companies typically sell gilts and invest in higher yielding corporate bonds — many of which are overseas — as well as infrastructure to make their profits.
Zoe Alexander, director of the Pensions and Lifetime Savings Association trade group, said she backed surplus release, with the right protections in place to ensure member benefits are secure.
“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,” she said.
