Pension surplus reforms: Economic stimulus or long-term gamble?

The government's announcement in March regarding measures to ease employer access to surplus funds within defined benefit (DB) pension schemes clearly highlights its intent to unlock billions in well-funded pensions. 

By facilitating access to around £150 billion in surplus assets, this will aim to stimulate economic growth, boost business productivity, and potentially enhance pension benefits for members. This move is expected to allow businesses to reinvest in operations. However, these reforms also present potential drawbacks which need to be considered. 

Firstly, allowing employers to access pension surpluses might introduce risks to the security of pension funds. There's a concern that prioritising economic growth could compromise the primary goal of safeguarding pensioners' interests, as per the FT. Therefore, it's crucial to implement safeguards to guarantee that the release of surplus funds does not jeopardise the financial stability of pension schemes or the benefits promised to their members. 

As trustees have a fiduciary duty to act in the best interests of their members, they are expected to seek assurances from employers that members will also benefit before agreeing to any surplus extraction proposals.

Many trustees are hesitant to release surplus funds, fearing a return to past deficits and the uncertainty of pension funding, especially with fluctuating bond yields. Despite over 30 FTSE 100 companies holding DB pension surpluses of over £100 million, most are unwilling to use them. Even Schroders, which supports the reforms, plans to release only 10% of its surplus annually to DC members. Historically, accessing surpluses has been rare, with just £180 million withdrawn between 2018 and 2023, largely due to a 25% tax and complex approval processes. 

Moreover, trustees worry that the long-term risks may outweigh any short-term business benefits. The government hopes these changes will encourage investment in riskier assets, but experts doubt a major shift. With only £68 billion actually available for extraction under current rules, the expected economic boost may be far smaller than anticipated.

Looking ahead, the Government is expected to provide more details on its surplus policy in its response to the Options for Defined Benefit Schemes consultation, originally published under the previous Government. 

This update, due this spring, and will coincide with the anticipated Phase 1 pension review, will shed light on how surplus rules may evolve, and it will be interesting to see how these changes align with broader pension reforms and what they mean for both employers and trustees.

Total mentions by topic (January - February)

• Pensions funding and deficit saw the greatest number of mentions between January and February with 455 stories, followed by State Pensions with 204 stories.

Examples of Pensions funding and deficit mentions this month 

• @paullewismoney - Listeners are upset and angry about Government plans to make their unused pension funds subject to inheritance tax and ask what they can do to reduce the effect, with Steve Hitchiner of @TheSPP1on @moneybox noon @BBCRadio4 
• @rosaltmann - A very good article exploring the damage caused by 'lifestyling' pension funds which lost 20-30% of members' money just before retirement in supposedly 'safe' assets:  The hidden pensions danger wiping millions from retirement pots
• @UKHouseofLords - In #LordsQs from 2.35pm: @rosaltmann: pension fund reliefs- UK–China Economic and Financial Strategy Dialogue- mental health problems in primary schools- @spellar: regulating car parking companies. Watch on Parliament TV: https://www.parliamentlive.tv/Event/Index/b536f55b-8b2f-4542-baab-02b5d84c2cd2