The UK government’s plans to allow surplus extraction for defined benefit (DB) schemes could boost the UK economy, but according to the investment industry, the detail will be key.
The UK government’s recent proposal to ease access to surpluses in DB pension schemes has sparked a lively debate among industry experts. This initiative, aimed at unlocking billions of pounds for investment in UK businesses and infrastructure projects, could reshape the landscape of pension management and economic growth.
Analysis from XPS Group shows that DB surplus flexibilities could unlock £100bn (€120bn) of value over the next decade, providing substantial benefits to both members and employers, while supporting the government’s growth agenda.
Owen McCrossan of abrdn Group Pension Schemes said relaxing rules around surplus extraction brings in the potential for DB schemes to contribute to the UK’s “productive finance” goals.
He suggested that a 5% allocation by DB schemes to productive assets, such as real estate and infrastructure, could raise approximately £50bn. This aligns with the government’s Mansion House Compact, which aims to unlock a similar amount from defined contribution (DC) pensions by 2030.
Sachin Patel, head of corporate DB endgame strategy at Hymans Robertson, agreed that sharing surplus could benefit the UK economy. “There is more than £160bn of surplus capital in private sector DB pension schemes and growing.”
He said the details will be key, adding: “It will be important for current legislative restrictions to be lifted whilst introducing smart tax initiatives. These could include incentives for investing in UK assets or tax-favourable mechanisms for sharing surpluses with other employer-based defined contribution pension schemes.”
Alastair Greenlees, head of investment strategy at Van Lanschot Kempen, added that statutory override will be important to achieve the government’s goal as surplus extraction should not be a “one-off” boost to the economy and investment.
He said that any blanket removal of the 25% dividend tax on released surplus is potentially lopsided against trustees and UK interest.
“International companies could simply fund surpluses, via dividends, overseas to international shareholders. The real opportunity seems to be to tie dividend tax rates to local use,” Greenlees noted.
He pointed out that the Labour manifesto is built around ‘real things’ – infrastructure, housing, among others – which was demonstrated by the go-ahead for a third runway at Heathrow last month.
He added that some companies have easy wins. “For BP and Shell, one could reduce government subsidies on North Sea oil and use surplus cash; for National Grid, develop the grid to tie with changing energy use,” he explained.
However, Greenlees said that for the banks, the government should aim to be concrete on how to tie their surplus use with a policy tied to building “real things”. “The question then becomes: who decides what is productive enough?”
He stressed that any policy needs to be tied to the eligibility of schemes to extract this surplus — can and should this be made straightforward? And which are the ‘fastest-growing industries’ the government has in mind as the recipients of the surplus funding.
However, Dominic Thackray of MHA cautioned that if pension trustees and investment managers saw a genuine case for increasing exposure to UK assets, the money would already be there.
He said that creating a more attractive growth environment for UK businesses would naturally draw investments, rather than forcing potentially detrimental allocations.
“Pension trustees of such schemes have a huge responsibility – for defined contribution schemes it means investment managers delivering returns for individual investors in line with risk parameters, and for defined benefit schemes managing investments of the pension trust it is to ensure that underlying investment and growth expectations meet income liabilities, with relatively cautious investments for the most part,” he said.
David Brooks, head of policy at Broadstone, said that while the proposals will make run-on more enticing, The Pensions Regulator (TPR) and the Pension Protection Fund (PPF) will be “keen to protect members’ security and minimise covenant risk”.
“It will be interesting to see whether the public sector consolidator idea is revived to allow smaller schemes to consolidate and then invest in productive finance,” he noted.
Brooks also questioned what run-on is going to look like for schemes wanting to invest for the return to be extracted while meeting the policy aim of investment in UK productivity.
He said: “The rhetoric for the government is clear – there are billions of pounds in pension schemes which should and could be used. However, similar to the arguments in the DC space over ‘mega funds’, the ultimate fiduciary duty for the trustees is to secure the members’ benefits that have been accrued over many years which may well be the Achilles heel of surplus utilisation.”
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