Six changes to seize the DB pension surplus opportunity

Willis Towers Watson proposes six changes the government could make to facilitate access to ‘trapped surplus’ within DB pension schemes – unlocking an opportunity to use the capital more productively for the benefit of employers, employees, and the UK economy.

UK private sector defined benefit (DB) pension schemes hold around £1.5 trillion in assets, and these schemes are better funded than ever. Many are on a path towards a very substantially de-risked asset portfolio, as part of their journey plan towards buying out with an insurer.

There are two major consequences of this direction of travel. First, neither employers nor their current or past employees stand to benefit from the opportunity presented by well-funded DB pension schemes. Second, the aggregate effect is contrary to the Government’s desire for UK pension savings to support economic growth by investing more in productive finance.
Some fundamental changes are needed to the pensions regulatory regime; otherwise the opportunity presented by strongly funded DB plans will be missed. Making it easier for employers, DB members, and employees saving through defined contribution (DC) schemes to benefit from surpluses, albeit with appropriate checks and balances in place, would encourage more employers and trustees to retain growth assets in their pension portfolios with the aim of making the surpluses more persistent. This would also benefit the wider UK economy.
WTW estimates most pension schemes are already in surplus on the Pensions Regulator’s proposed ‘Fast Track’ low dependency basis; this is a conservative funding basis, which assumes very low future investment returns. Many more are close. The opportunity for the UK to take advantage is therefore one that exists today; equally, unless the pensions regulatory regime changes in the very near future, the opportunity will be missed. The key to realising this opportunity is unlocking ‘trapped surplus’: with appropriate checks and balances, it should be easier to access surpluses when they arise.
This would give employers and trustees a reason to invest in assets with higher expected returns. By extending schemes’ time horizons and delaying the journey to buyout, it would also facilitate investment in less liquid assets such as UK infrastructure projects. We propose six changes the Government should make:

1. Create a legislative mechanism to transfer DB surpluses to DC schemes.
2. Reduce the tax rate on employer refunds.
3. More readily allow ongoing refunds of surplus.
4. Remove tax barriers to sharing surplus with members.
5. Avoid new funding regulations triggering excessive de-risking.
6. Revisit The Pension Regulator’s statutory objectives. 

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