The Department for Work and Pensions has said it will amend the existing framework for surplus extraction from defined benefit (DB) schemes to remove barriers to extraction, while maintaining stringent funding safeguards to protect members’ benefits.
The announcement comes as the government published a response to the ‘Options For DB schemes’ consultation, which was launched under the Conservative government to explore new measures such as surplus extraction and a public sector consolidator run by the Pension Protection Fund (PPF).
In its response, the government said it would give trustees power to modify their scheme rules to allow surplus extraction at their discretion, as trustees “remain best placed to make decisions in the context of their individual scheme circumstances and their duties to scheme beneficiaries”.
The government will also amend the threshold at which trustees are entitled to share surplus with the sponsoring employer from the current buyout threshold to a threshold set at full funding on the low dependency funding basis, with further detail to be set out in draft regulations.
The government has estimated that the total surplus within DB pension schemes stands at £160bn (€190bn).
The government said it will amend section 37 of the Pensions Act 1995 to clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged.
DWP said this provides “robust” protection to scheme members.
At present, DWP said the rate of taxation applicable to surplus extracted from DB schemes will remain at 25% and the government will continue to consider the wider tax regime for surplus extraction.
According to today’s consultation response, the government has decided not to introduce a 100% underpin from the Pension Protection Fund (PPF) for those who opt for surplus extraction, but it will continue to explore the viability of a public consolidator.
It said it has seen a “significant” innovation and development in the buyout market, especially at the smaller scheme end but that these options may not be avaialble for some underfunded schemes.
‘Bold’
According to Steve Hodder, partner at LCP, the government has demonstrated boldness in “avoiding unnecessary layers of caution in their plans for DB surpluses”.
He said that while it is “paramount” that member benefits are protected, the surpluses of DB schemes are “very real and robust”.
He said: “Regulators have devoted considerable time and energy in developing a low dependency measure for scheme funding, and that is the right yardstick to allow trustees to consider if their scheme is now able to productively use its excess assets. .
“From our early conversations with ministers in the last government, the issue of productive use of surplus funds has been thoroughly examined and consulted on, and the Government’s final proposals are to be warmly welcomed.”
Hodder said that the role of pension scheme trustees will now be “key”, as the industry settles into new norms of using strong DB schemes to benefit scheme members, sponsoring firms and the wider UK economy.
Iain McLellan, director at Isio, another consultancy, said the government’s proposals “mark a significant shift in DB scheme regulation”.
“For two decades, the focus has prioritised securing existing accrued benefits above all else, including future benefit accruals and discretionary increases. The industry is keen to embrace these changes and the opportunity to support growth and greater innovation.
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