The government confirmed today (22 November) that to enable pension funds to invest in a diverse portfolio, it will be consulting this winter on whether changes to rules around when DB scheme surpluses can be repaid, including new mechanisms to protect members, could incentivise investment by well-funded schemes in assets with higher returns.
Documents accompanying the chancellor’s Autumn Statement today revealed the Treasury also plans on reducing the authorised surplus payments charge from 35% to 25% from 6 April 2024.
This announcement comes as part of a plan to make it easier for well-funded DB schemes to run on and build a surplus, which Lane Clark & Peacock said is a “huge leap forward”.
Partner Steve Webb noted: “Today’s announcement represents a huge leap forward in plans to allow well-funded DB schemes to invest for growth. Provided that member benefits are protected, schemes would be able to build up surplus funds, benefiting existing members, the next generation of pension savers and the sponsoring employer. Rather than risk ‘wasting’ the potential of over £1trn of assets which have been painstakingly built up over decades, this new regime would be a win for members and sponsors alike.
“And the announcement of a lower rate of tax on extracted surpluses is a clear sign that the Treasury is serious about these plans. We look forward to seeing the consultation on the details of how this new regime will work and encourage all well-funded schemes to include the option of running on when deciding on their end game strategy.”
TPT Retirement Solutions business development director Nicholas Clapp said: “The proposal to make it easier for sponsoring employers to access scheme surpluses could be hugely beneficial. Releasing this capital for business investment could fuel economic growth. These reforms also create an incentive for schemes to run on, serving as an alternative solution to an insurer buyout. This could benefit trustees, sponsors and pension scheme members by providing more endgame options.”
Aon partner Alex Beecraft noted the announcement is a “landmark moment” for the DB pensions industry “that reflects the improved funding situation facing many schemes”.
“If enacted, new flexibilities on recovering surplus could make it easier for sponsors to obtain a refund on the significant contributions made over the last decade, while preserving ongoing member experience and benefit flexibility.
“Key to this will be testing the strength of its sponsor, capital strategy and governance arrangements to show that pensions will remain secure outside of insurance.”
XPS Pensions Group partner Wayne Segars added: “We welcome the government’s plan to introduce measures to allow DB pensions schemes to access surplus.”
However, he warned: “But given many schemes are already in surplus, the industry needs clear rules now that provide a structure for trustees and employers to run their schemes on and to safely build up and release surplus. Employers could then be allowed to access these funds, provided they use them to reinvest in their UK operations or boost the pension savings of other employees in DC schemes.”