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Sir Keir Starmer will promise on Tuesday to unlock some of the £160bn of surplus held in corporate defined-benefit pension schemes, in a bid to inject a surge of cash into the British economy and boost growth.
The UK prime minister will tell an audience of executives in the City of London that restrictions on the use of pension surpluses will be eased, a move praised by former Conservative chancellor Jeremy Hunt.
Starmer’s decision is intended to drive investment by businesses while also encouraging them to take more risk in their pension investment strategies. “Today’s changes will unlock billions for investment,” Starmer said.
The government estimates that about 3,750 corporate defined-benefit pension schemes are in surplus, holding £160bn of assets in excess of the payments they owe to their members. Less than £70bn is eligible to be returned to companies under current rules. Total assets in the system are £1.2tn.
“This reform has the potential to fundamentally change the way employers view their defined-benefit pension schemes, transforming them from liabilities to offload, into valuable assets worth running on for the longer term,” said Morten Nilsson, chief executive of Brightwell, which manages the BT pension scheme, the largest in the FTSE 100. BT’s scheme is in deficit.
After several weeks in which chancellor Rachel Reeves has made a series of growth-related announcements, Starmer’s move on Tuesday will be an answer to critics that he has taken a back seat on the economy.
“To achieve the change our country needs requires nothing short of rewiring our economy,” Starmer will tell the bosses of Lloyds, Nationwide and Tesco, along with other executives. “It needs creative reform, the removal of hurdles and unrelenting focus.”
The pension reforms follow criticism from some business leaders that Starmer and Reeves have undermined growth with a £40bn Budget tax rise, a thicket of new employment laws and gloomy rhetoric.
Hunt floated the defined-benefit pension reforms in his 2023 Mansion House speech but ran out of time to deliver them before last year’s election, which delivered Starmer and Labour into power.
“I may have my political differences with Rachel Reeves on business tax rises but I strongly welcome the momentum she has put behind the Mansion House reforms,” Hunt told the Financial Times.
Under Labour’s plans, DB schemes could change their rules to permit surplus extraction where the employer and the trustees of the pension scheme agree. The plans would require legislation.
Currently, DB scheme surplus can only be accessed where schemes passed a resolution by 2016 to retain the power, under a 2004 law passed by the last Labour government. Some schemes had large deficits and did not pass such resolutions.
Surpluses are also only accessible if they exceed the level needed for a business to sell its scheme to an insurer. The UK’s Pension Protection Fund estimates that £68bn of the £160bn of the total current surplus meets this threshold.
Around £180mn of surplus was accessed by companies between 2018 to 2023, according to government estimates last year. Businesses are taxed at 25 per cent on surpluses they receive.
Pension scheme funding levels have improved dramatically in recent years because higher government bond yields have increased expected returns on assets, therefore reducing the current accounting value of future liabilities.
Pension trustees welcomed the government’s announcement, provided member outcomes were protected.
“All trustees really care about is paying scheme members, but as a general theme we would be supportive of releasing surpluses in the right circumstances,” said Vassos Vassou, council member of the Association of Professional Pension Trustees.
He noted that in recent years, companies with large surpluses in their pension schemes had opted to sell them to insurance companies in bulk annuity transactions called buyouts. About £50bn of pension obligations have been sold in each of the past two years, according to consultancy WTW.
Some advisers are sceptical that many companies will make use of Labour’s reforms. “I just don’t think there will be many people who want to do it — either they want to do a buyout or just put more money into the scheme until they can,” said John Ralfe, an independent pensions consultant. He noted the 25 per cent tax levied on cash extracted from pension surpluses.
On Monday Reeves urged Labour MPs to get behind the growth strategy, with some backbenchers nervous that the party is damaging its environmental credentials and appearing to side with business over consumer interests.
“If we get this right — and I know we will — the prize on offer is immense,” she told the Parliamentary Labour party. Reeves, who has been criticised by business for appearing to talk the economy down, urged Labour MPs to be positive. “Now is the chance for us to shout about that potential and the brighter future ahead,” she said.
She added: “Over the past six months as chancellor, my experience is that government has become used to saying ‘no’. That must change. We must start saying ‘yes’.”
