A UK Government press release has announced plans to relax restrictions on access to surpluses in defined benefit schemes.
The Prime Minister and the Chancellor met business leaders this morning to discuss the idea. However, full details will not be published until the spring, when the Government intends to respond to the February 2024 consultation Options for Defined Benefit Schemes (which also proposed a public sector consolidator, to be run by the Pension Protection Fund – our analysis of that consultation is available in our previous Hot Topics: Consultation on access to DB surplus and the role of the PPF, and results of a client survey in our Pensions Briefing article: Reforms to pension surplus rules – WTW evaluates the UK Government’s proposals).
Currently, three main conditions must be satisfied before an ongoing scheme can make payments to the sponsoring employer: the scheme rules must allow it; the scheme must be fully funded on a solvency basis; and trustees must be satisfied that doing so is in members’ interests. The press release indicates that policy will target the first two conditions, saying:
Nothing in the press release suggests that the Government is looking to relax requirements for trustees to satisfy themselves that a surplus refund would be in members’ interests. Trustees’ “overarching fiduciary duty to act in the best interests of their members” is mentioned, along with the possibility of members’ benefits being enhanced as part of a surplus-sharing agreement. It is suggested that trustees would “assess the suite of options available in striking a deal with employers on how best scheme members can also benefit”.
The parts of the press release written by the Government focus on releasing existing “trapped surpluses”, with the hoped-for growth effects coming from how that money is used. However, the press release also includes industry comments indicating that easier access to surplus might encourage schemes to run on for longer and take more risk, with a goal of sharing further gains between members and sponsoring employers. Whether or not that forms part of the Government’s vision, schemes should be able to take advantage of legislative changes in that way.
Last year, the previous Government said that, if policy facilitated access to surplus, it would not impose restrictions on how released funds were used. Although the press release does not explicitly reaffirm this, it mentions a wide variety of possible uses, including wage rises, investment or redirection to employers’ defined contribution schemes.
Commenting on the Government’s proposals, the chief executive of the Pensions Regulator has said: "Our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits. Where schemes are fully funded and there are protections in place for members, we support efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy."
One possible date for publishing further details is 26 March, when the Chancellor is due to give a statement to the House of Commons addressing new Office for Budget Responsibility forecasts. Such a timetable should allow measures to be included in the forthcoming Pension Schemes Bill. The press release does not confirm that this is the aim, but legislating quickly would be consistent with the Government’s refrain about going “further and faster” in pursuit of economic growth and would help the Government argue that it is taking “business-friendly” actions at the same time as increasing employers’ National Insurance Contributions.
A further DB policy announcement is expected later this week, with the PPF having said it will confirm 2025/26 levy policy by the end of January. Levies might be set to zero if the Government indicates that it will remove legislative barriers to them being reintroduced later.
