Regulatory reform could potentially generate £400bn of surplus capital in DB pensions schemes according to analysis by Hymans Robertson. The firm calculates that moving towards growth orientated assets, even at a modest 2% p.a., on top of accessing current surpluses, could unlock £400bn worth of capital over the next decade. The simple change could benefit all stakeholders including employers, pensioners and earners across all salaries. However, the key and biggest benefit could be to the broader economy.
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The leading pensions and financial services consultancy believes that locking capital in DB pension schemes is a missed opportunity, with the largest schemes in the UK accounting for nearly £1trn of assets. Current rules and legislation are prohibiting the ease with which greater surplus could be accessed. The firm says these restrictions must be lifted, and the forthcoming Pension Bill needs to include a statutory override that would enable greater flexibility for the distribution of surplus funds for any scheme. To further incentivise this change, the government could also look at offering tax benefits in the form of, for example, tax relief for sponsors when there is re-investment of surpluses into UK productive assets or for the sharing of surpluses with other workplace pension schemes.
Commenting on the current DB surplus reforms and the need for the government to go further, Sachin Patel, Head of Corporate DB Endgame Strategy, Hymans Robertson says: “Members must remain at the heart of any changes that are made within the DB surplus sphere and safeguarding their benefits must always be the priority. The current system, as is, supports this. However, there has been a huge shift in the markets – with many schemes now much better-funded, and therefore resilient to economic events and in surplus. It feels like now is the time, with a relatively new government in place to make real change through the lifting of regulatory and legislative constraints around the use of the surplus via the forthcoming Pensions Bill. It’s also not just about accessing surplus today, but building a long-term model to create real value for all stakeholders.
“Currently the largest schemes in the UK have nearly £1trn worth of assets. If these DB schemes were able to distribute future surpluses, and use it for other purposes, the ability to boost economic growth while maintaining pension security could be a once-in-a-generation opportunity.
“Clearer guidance on Trustee fiduciary duties, as well as a re-alignment of the Pensions Act 2021, to not inhibit taking risk in a measured approach, would give DB pension schemes the opportunity to make a real difference. The potential distribution of DB surpluses to less adequate DC pots or improving DB benefits that haven’t kept up with inflation, are just some of the ways in which this change could be transformative for individuals across the UK. The potential is endless – this could be the revival that DB pensions need, encouraging schemes to run on and continue to build up and distribute surplus. Whilst there would be a move towards greater growth assets such as capital, pension schemes will naturally still invest in gilts, helping to maintain long-term confidence in the UK market – a win-win for all involved.”
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