The government intends to change pension rules to allow surplus funds in defined benefit (DB) pension schemes to be invested in the wider economy.
Government says trustees will need to agree to share scheme surplus, with an estimated 75% of schemes currently in surplus worth £160 billion.
Maxwell and other historic pensions scandals show that protecting members must remain the number one priority. Government consultation on driving consolidation in multi-employer workplace pension schemes and the local government pension scheme (LGPS) to create ‘mega-funds’ closed this month. A pension scheme bill is expected later this year that will consult on legislation to drive forward both these initiatives.
Rachel Vahey, head of public policy at AJ Bell, comments: “The government, desperate to boost UK growth, has long had plans to tap into pension funds as a potential source of new UK investment.
“As part of its pension revolution, it has already put forward plans to create pension ‘megafunds’ by driving consolidation in the defined contribution workplace market. But now it has its eye on harnessing the monetary power of surpluses in defined benefit (DB) schemes.
“It intends to allow part of a DB fund surplus to be returned to the employer for them to invest in their core business, or bolster pension scheme members’ benefits. But in doing so, the government is encouraging trustees to take risks with other people’s money.
“Maxwell and other historic pensions scandals still live long in the memory, and it’s imperative we don’t forget about the pension saver at the heart of this revolution. Trustees have an important role here. They need to be gatekeepers to the surplus, to make sure it is only handed to employers where the members’ financial future isn’t compromised. But they could find themselves caught in the crosshairs, facing pressure from employers on one side to release funds, whilst meeting their number one objective to protect pension scheme members on the other.
“There is no doubt a healthy surplus has built up in many DB schemes, thanks partly to the rise in long-term gilt yields which has led to a reduction in liability values. But there is no guarantee these clement financial conditions will continue, and if employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme.
“The government risks playing fast and loose with people’s financial later lives. It’s imperative that protection is built into any changes to prevent any future Maxwell-style raids on people’s pensions.”
Gilt yields
DB pension schemes’ funding positions have improved dramatically in recent months. This improvement has mainly been driven by rising gilt yields, especially since the Budget, fueled by expectations of higher future government borrowing.
Source: PPF7800 Index, December 2024
