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Employers’ access to billions of pounds of surpluses in UK company pension funds would be eased under proposals set out by the government on Friday.
The proposals come after the funding positions of defined benefit retirement plans have improved significantly over the past 18 months due to rising interest rates making it cheaper for the schemes to meet the costs of their pension obligations.
A recent analysis by The Pensions Regulator estimated that more than 3,750 of the UK’s 5,000 private-sector DB schemes were in the black, with an aggregate surplus of more than £225bn.
The government said it was considering a statutory override to allow the trustees of the schemes, also known as final salary pensions, to share the surplus subject to the “appropriate” funding levels.
The current rules, which differ from plan to plan, make it difficult or in some cases impossible to tap excess cash and are designed to protect members’ benefits which need to be funded during their lifetimes.
“We are in a welcome position with DB pension schemes enjoying high levels of funding, and we want to make this money work harder for savers and the wider economy,” said Paul Maynard, minister for pensions.
“There is potential for trustees to share surplus with scheme members and sponsoring employers in recognition of their historical contributions. Current legislation, however, makes it difficult and costly for many scheme trustees to do this.”
The consultation said any changes to a scheme should be made only if it could be shown that members were protected. “We are consulting on a range of potential safeguards to ensure these additional flexibilities for trustees do not threaten member security,” according to the document.
Sir Steve Webb, a former pensions minister and now partner with LCP, the actuarial consultants, said the suggestion of a statutory override was “very positive” for schemes looking for options for surplus.
But he cautioned: “We do not believe many trustees would be reassured if the only safeguard for members before money could be taken out was that the scheme was currently well funded.”
As part of the reforms, the government gave further details about its plan announced in November to create a public pension consolidator by 2026, which could help channel billions of pounds of pooled pension cash into areas that help economic growth. It said the public vehicle would target DB pension schemes that were “unattractive” to the private sector.
But insurers expressed reservations about the easing of restrictions on pension surpluses and the need for a consolidator. “The central purpose of DB pension schemes — to pay the benefits promised to members — should not be undermined,” said Hetty Hughes at the Association of British Insurers, the industry trade body.
Analysts have warned that the proposals would probably reduce the number of employers looking to offload their pension schemes to insurers under so-called bulk annuity arrangements. The consultation closes on April 19.
