Government consults on LCP proposals for reforms to make better use of DB pension scheme assets

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In his Mansion House speech last night, the Chancellor announced a raft of reforms designed to ensure that the money saved in UK pension schemes is used more productively.  Many of the announcements related to better use of funds invested in Defined Contribution pension schemes but, for the first time, the Government has made clear its willingness to turn its attention to the much larger sums currently held in over 5,000 DB pension schemes.  Whereas workplace DC pension schemes are currently worth an estimated £500bn, the assets in DB pensions currently sit at well over £1 trillion, according to the latest estimates from the Office for National Statistics.

DWP has now published a ‘call for evidence’ on ‘options for Defined Benefit schemes’.

One of the principal reform options discussed in the consultation document is an idea developed over the last year by consultants LCP, designed to free up well-funded DB pension schemes to invest for long-term growth instead of continuing to move into more and more low-risk, low-return assets.  The LCP idea does this by creating an innovative new way of making sure that DB member benefits are secure, dubbed “Protection Supporting Prosperity”, freeing up well-funded DB pension schemes to invest for long-term growth.  Longer-term higher returns generated by this approach can be used for the benefit of members, savers, companies and the wider UK economy.

The key features of the LCP proposal are:

  • It would be an opt-in regime, available only to well-funded DB pension schemes;
  • Such schemes would be allowed to pay an increased levy (a ‘super levy’) to the Pension Protection Fund;  in return for this, the level of cover provided by the PPF would rise from its current level of around 85-95% of member benefits to 100% - what LCP are calling ‘PPF Super Protection’;  this would ensure that member benefits were fully protected even in the unlikely event that the sponsoring employer were to become insolvent;
  • With this security for member benefits in place, the trustees and sponsor could then adjust the DB scheme’s investment strategy to target a higher level of long-term growth;
  • In turn, these higher returns would be excepted to lead to pension schemes having more money than required, and, provided there is a clear ‘buffer’ above the minimum level required to opt in to this regime, any additional money ( a ‘super surplus’) could be used by the employer to the benefit of scheme members, the business and its employees;

The potential advantages of this approach include:

  • The money invested within DB schemes could be used more productively, including in UK equities and/or long-term illiquid investment supporting infrastructure projects and the transition to Net Zero; 
  • DB member benefits would be 100% secure for the first time;
  • Progress on productive finance could be made as soon as the relevant regulatory changes were in place, rather than requiring shifting pension scheme assets (and associated membership rights) to another organisation, as would be required in some other proposals;

By generating a larger ‘pot’ a wider group of stakeholders could benefit;  these could include:

    • The ‘DC generation’ of savers, many of whom are currently not building up enough pension for a decent retirement;  they could benefit either through surplus funds being transferred from a DB scheme to a DC scheme in the same trust, or through the employer using some of the ‘super-surplus’ taken out of the scheme for higher DC contributions
    • DB members, who might be offered ‘discretionary’ increases above the minimum level specified by the scheme rules;  for example, many DB members had increases in April 2023 capped at 5% or lower (some with zero increases) when inflation was over 10%;  discretionary benefit increases could help to close some of this gap;
    • The sponsoring employer itself, which could benefit from using surplus funds to invest in the business and/or benefit the wider workforce and investors;

LCP CEO Aaron Punwani said:

“I’m delighted that LCP’s ideas are finding favour at the heart of government, as there is potential here for a real win-win.  DB pension scheme funding has been transformed in the last decade with far more talk today about surpluses than deficits.  There is the potential for these huge funds to be invested for long-term growth creating a larger ‘pie’ to be shared around, whilst ensuring DB member benefits are fully secured.  The beneficiaries could include younger savers in Defined Contribution pension arrangements, many of whom have very modest pension pots, as well as the members of the DB schemes who will enjoy the possibility of benefit uplifts.  But we will all benefit if the vast sums currently sitting in DB pensions could be used to invest in our long-term future as an economy and as a society”.

More details of LCP’s proposal can be found on the website here