Government plans to free up surplus pension funds a ‘red letter day’ for pensions – Steve Webb, LCP

The Government’s plans to free up as much as around £160 billion of surplus funds sitting in Defined Benefit pension schemes represent a ‘red letter day’ for DB pension schemes, their members and the companies who stand behind them, according to LCP Partner and former pensions minister Steve Webb.

Under the Government’s plans, rules will be relaxed to allow pension scheme trustees to agree with company sponsors that ‘surplus’ funds can be used in a variety of ways. This could include improving benefits for existing members of the scheme, using surplus funds to boost the pensions of employees of the sponsoring employer and/or allowing funds to be returned to the company to be used to benefit the business.

The funding of Defined Benefit pension schemes has improved dramatically in recent years, with the majority of schemes now in surplus and the combined surplus (relative to a ‘low dependency’ benchmark) currently estimated to be around £160bn. Some schemes have already put in place arrangements to use some of their surplus funds where circumstances allow, but the new legal framework will make this much easier and is likely to lead to far more companies and schemes considering how best to use their surplus. Trustees will now have more flexibility and scope to consider running a scheme on and exploiting these new freedoms alongside other endgame options for the scheme, including securing pensions through a buyout deal with an insurance company or consolidating into a Defined Benefit superfund. 

Commenting, Steve Webb said:

“This is truly a red letter day for pension schemes, their members and the companies who stand behind them. 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. Pension scheme funding has been transformed in recent years, with the majority of schemes now in surplus and funding improvements locked in through low-risk investment strategies, meaning that they are here to stay.
“Pension scheme trustees will have a crucial role to play in ensuring that member benefits remain secure in the event of surplus funds being extracted, and guidance from the Pensions Regulator is likely to set sensible boundaries for these new freedoms.  But the Government has clearly been bold in this area, and this opens up the potential for this surplus money to be used more productively to benefit scheme members, firms and the wider economy.”