Investment consultants have shared mixed views on whether UK plan sponsors could benefit from surpluses on their defined benefit (DB) schemes as a result of the Mansion House reforms.
Research conducted by Barnett Waddingham found there could be around £50bn of surplus funds available to be returned to sponsors of FTSE 350 DB schemes if the Mansion House proposals were to be agreed.
The Mansion House reforms were announced by the UK’s chancellor of the exchequer, Jeremy Hunt, at the end of June. As part of the reforms, the Department for Work and Pensions (DWP) issued a call for evidence centred on the idea that pension schemes embrace greater investment risk by investing in “productive finance”.
The intention of the reforms is that surplus returns could be generated for pension scheme sponsors and members, benefitting the UK economy as a whole.
The suggested £50bn is equivalent to around 10% of FTSE 350 DB scheme assets, according to Barnett Waddingham.
The consultant’s analysis assumes that any surplus above 105% funding on The Pensions Regulator’s (TPR) proposed fast track low dependency basis would be available to be returned to sponsors.
Barnett Waddingham acknowledged however that not all schemes will be able to return surplus funds to sponsors in full but stressed that it is “clear” that the Mansion House reforms could have a profound impact for sponsors of DB schemes.
Mark Tinsley, principal at Barnett Waddingham, said: “Many pension schemes have seen large improvements in their funding positions over the past year and now have significant surplus funds. Sponsors therefore stand to benefit considerably if the rules around returning surplus funds are relaxed, as is being considered under the so-called ‘Mansion House reforms’.
Another report from XPS Pensions Group found that the changes proposed by the UK government on how companies can use surpluses could generate £100bn for companies and pension scheme members by 2034.
The report proposed that these surplus funds could be used to improve pensions for DB members, build pension pots of defined contribution (DC) savers or reinvest it into UK businesses to provide a boost to the UK economy.
XPS has also proposed a number of industry and regulatory changes on a condition that surpluses are used by sponsors to facilitate these investments.
These include making long-term run-on for DB schemes a genuinely viable alternative to full insurance buyout, and providing sponsoring companies with a legal right to access these pension scheme surpluses on the condition that DB schemes are fully funded above insurance buyout levels.
It also proposed removing the 35% tax on funds withdrawn from pension scheme surpluses as an incentive for companies to redeploy such surpluses.
Paul Cuff, co-chief executive officer of XPS Pensions Group, said: “The defined benefit pensions market is rightly focused on protecting the security of members’ benefits.
“But there’s an opportunity to use pension surpluses to address societal goals – like levelling the playing field between people in DB and DC pension schemes or encouraging investment in companies’ UK operations.”
He added: “The approach we have outlined can contribute to UK growth while protecting DB scheme members’ benefits.”
However, according to Matthew Arends, partner and head of UK retirement policy at Aon, putting a figure on the potential surplus of DB pension schemes that could be returned to companies is “speculative” at best.
He said: “The Mansion House reforms gave no indication of how to assess a surplus for these purposes. Lots of measures are possible, which can inevitably lead to different assessments of overall surplus levels. But beyond that, would all the surplus go back to companies? It seems reasonable to expect that some would be spent on benefit improvements and in other cases it would be used as a funding buffer while the scheme is run on, for example.”
Arends added that Aon has clients that are already extracting surplus from their DB pension schemes, for example by using that money to pay for DC pension accruals.
He continued: “The circumstances needed for this to be workable are limited and the reforms offer the prospect of this becoming more feasible in more situations, which is to be welcomed.”
He added that it does mean that it’s “questionable that measures of DB surplus levels represent new money that companies could access if and when reforms are implemented”.
It is also difficult to know how much, if anything, could be returned to sponsors, according to James Brundrett, senior investment consultant at Mercer, who pointed out it that it would depend on a number of criteria including how the scheme rules are worded, legal aspects of it and who participates in that surplus.
He added that ideally, where a scheme is well funded as “a lot of them are now” and there is a surplus there can be a “grown-up conversation between the trustees and the sponsor to decide what they’re going to do”.
He continued: “Clearly those conversations are going to be steered by the trust deed and rules.”
And even if the surplus adds up to £50bn as estimated by Barnett Waddignham or £100bn as estimated by XPS, Brundrett said the question remains around what it means and when that would come back to the companies.
He continued: “If they [plan sponsors] are going to be patient over the next 10 years, they might get it if they put it in the funding agreement, because in most cases they will only get their hands on a surplus if they planned for it, if not they will have to wind up the scheme and that might take a long time.”
He pointed out that there are other options, such as captive insurance, available to sponsors to “get their hands on the surplus now” but a lot of sponsors “haven’t thought about it properly”.
“There is a real risk of a lot of sponsors ending sleepwalking into a buy-in or a buyout if they haven’t considered all of these options and realise what the economic benefit is, Brundrett said, adding: “That said there’s still going to be sponsors who just can’t be bothered to deal with the hassle of a DB pension scheme and will pleased to get it off their books.”
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