UK seeks to improve employer access to pension surpluses

As part of a wider plan to stimulate economic growth, the government is looking at ways to make it easier to access surplus funds in pension schemes.

Employers and trustees of defined benefit schemes, also known as ” final salaries”, cannot access surpluses that have been built through contributions and investment growth.

The recent rise in interest rates led to an increase of funding for thousands retirement plans. It is estimated that the total surplus for DB plans now exceeds £300bn.

The government announced on Tuesday that it would ease access for employers to surplus funds as part of its efforts to redirect £1.7tn in DB pension assets to areas which provide capital and financing 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 proof.

The report added that the assets of DB schemes could be used to benefit members, employers, and the economy.

The government stated that the incentives for employers to create a surplus in their pensions by switching to higher-risk but potentially more profitable assets were “quite low”.

The report also stated that access to employers was severely limited and many were at risk of having to pay higher contributions in the event investment returns turned out worse than expected.

The government wants to know what tax changes are needed to make the payment of a surplus to an employer more “attractive”. Under the current rules, these payments are subjected to a tax of 35 percent.

The Ministers also asked for views on the appropriateness of using extra funds generated from DB plans to pay pension contributions to staff in other company pension schemes.

Steve Webb, a partner at LCP, a firm that specializes in actuarial work, said, “DB pension schemes funding has changed over the past decade. Today, there is more discussion about surpluses rather than deficits.”

There is the possibility of investing these large funds for long-term development, creating a bigger pie that can be shared.

The government acknowledged that changing the way DB assets were invested could have “considerable” effects on the economy and would need to proceed “prudently”. The majority of DB assets is currently invested in UK Government Bonds, also known as gilts.

The paper stated that “as well as protecting pensions, we must prioritize having a strong and diverse gilt market. Our decisions must strengthen UK’s competitiveness as a leading international financial center.”

Separately the government requested evidence about changes that would give a government-backed pensions lifeboat fund a larger role in consolidating solvent schemes from the private sector. The Pension Protection Fund currently only assumes responsibility for schemes when the corporate sponsor is insolvent.

Beth Brown, a lawyer with Arc Pensions Law said that any proposal encouraging riskier DB investments strategies would need to be “carefully considered”.

Brown said that “nobody wants to see schemes engaging in risky behavior on the basis they can opt in the Pension Protection Fund, or the good behaviour changes around funding are undone by accidentally rewarding employers who have not funded their scheme well.”