Government plans to loosen rules around use of pensions surpluses

The Government announced on 28 January that it plans to make it easier for Defined Benefit (DB) pension schemes to utilise their surplus assets. This is part of a series of measures being introduced by the Government to remove blockages preventing growth in an attempt to kick-start the UK economy.

Over the last few years, the funding position of many DB schemes has significantly improved. This has meant that many schemes previously in deficit (i.e. the investments they held were projected to be insufficient to pay out all of the scheme members’ pensions) now hold a surplus of assets. One of the main reasons for the improved funding position has been rises in long-term gilt yields, which has reduced the value of DB liabilities. According to the Government, approximately 75% of DB schemes are now in surplus, to the tune of approximately £160 billion.

Some schemes and sponsors have taken advantage of the improved funding positions by undertaking bulk annuity transactions with an insurer – a process which involves transferring all of the assets and liabilities of a DB scheme to an insurance company who then becomes responsible for paying members’ pensions.

However, not all schemes are in a position or want to undertake a bulk annuity transaction, preferring instead to run the scheme on. But there has been a growing concern that surplus in these schemes could be “trapped” because of existing rules which restrict the way in which surpluses can be used. Currently, DB surpluses can only be accessed in an ongoing scheme where the scheme rules permit this and a certain type of resolution was passed before April 2016.

Under the new rules proposed by the Government, DB schemes will be able to amend their scheme rules to permit surplus extraction where there is an agreement to do so between the trustees and employer. According to the Government, this will then allow “trustees to assess the suite of options available in striking a deal with employers on how best scheme members can also benefit”.

Potential options for using the surplus under the new rules include:

• using it to augment scheme members’ benefits,
• using it to fund contributions paid to a sponsor’s defined contribution pension arrangement, and
• paying it to the sponsor, to facilitate (for example) investment in their own business.

The Government’s announcement on surplus has generally been welcomed in the pensions industry, including by the Pensions Regulator (TPR), which has expressed its support for the plans. Many have commented that, provided there are appropriate safeguards in legislation and suitable guidance is in place from TPR, the relaxation of the surplus rules would open up the prospect of more DB schemes running-on for longer and in ways that can benefit members, sponsors and the wider UK economy.

In terms of what to expect next, the Government has said it will set out further details of its surplus policy in its response to the “Options for Defined Benefit schemes” consultation (published under the previous Government), due this Spring.