UK plans to improve employers’ access to pension surpluses

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The government is considering options to make it easier for private sector employers to access tens of billions of pounds of surplus funds that have built up in their pension schemes, as part of wider plans to stimulate economic growth.

Currently, employers and trustees behind defined benefit, or “final salary”, schemes cannot easily access any surplus that has built up through investment growth and contributions.

This has recently become a problem as a surge in interest rates has led to an increase in funding for thousands of retirement plans, with the aggregate surplus for DB schemes now estimated at more than £300bn.

On Tuesday, the government set out options to ease employer access to fund surpluses as it looks for ways to steer £1.7tn of DB pension assets into areas that provide capital and finance for UK businesses. 

“With most schemes closed to new entrants, the pensions landscape is maturing, and trustees and employers are seeking to limit risk and volatility as the time horizons for their schemes reduce,” said the government on Tuesday in its call for evidence.

“There may be potential for the assets held by DB schemes to work harder for members, employers and the economy,” it added.

The government said that incentives for employers to build a pension surplus, through switching to riskier but potentially higher growth assets, were “quite weak”.

It added that employers’ access was strictly limited, with many at risk of paying higher contributions if investment returns are worse than expected.

The government is seeking views on what tax changes might be needed to make paying a surplus to the sponsoring employer “attractive”. Under current rules, such payments are subject to a 35 per cent tax.

Ministers have also sought views on when it might be appropriate for extra funds generated by DB schemes to be used to pay for pension contributions for staff in other company pension plans.

“DB pension scheme funding has been transformed in the last decade with far more talk today about surpluses than deficits,” said Steve Webb, partner with LCP, an actuarial firm.

“There is the potential for these huge funds to be invested for long-term growth creating a larger pie to be shared around.”

The government said it was aware that changes to how DB assets are invested can have “considerable effects” on the economy, and that it would need to go “cautiously”. The bulk of DB assets are currently invested in UK government bonds known as gilts.

“As well as ensuring pensions are protected, we must prioritise having a strong and diversified gilt market and our decisions must strengthen the UK’s competitive position as a leading financial centre,” said the paper.

Separately, the government called for evidence on changes that would give the pensions lifeboat fund, a government-backed body, a greater role in consolidating solvent private sector schemes. Currently, the Pension Protection Fund only takes on schemes when their corporate sponsor fails.

Beth Brown, a partner with Arc Pensions Law, said any proposals that encourage riskier DB investment strategies would require “careful consideration”.

“Nobody will want to see schemes engage in risky behaviour on the basis that they can opt into the Pension Protection Fund or the good behavioural changes around funding being unwound by inadvertently rewarding employers which have not funded their schemes well,” said Brown.