UK-based consultancy LCP believes the figures from The Pensions Regulator (TPR) suggest that the UK government is looking to unlock surplus extraction for fully-funded schemes on a low-dependency basis.

Last month, the UK government announced plans to allow more flexibility to enable surplus from DB schemes to be returned to employers and/or shared with scheme members as additional pension benefits.

Until now, it was expected that surplus extraction would involve “spare cash” above the buyout funding level. According to figures from TPR this would bring surplus to around £100bn (€120bn), LCP stated.

A summary of the overall aggregate funding position as at 30 September 2024. Source: TPR

Figures as at 30 September 2024

Technical provisions

Low dependency

Buyout

Assets (£bn)

1,240

1,240

1,240

Liabilities (£bn)

1,033

1,103

1,233

(Deficit)/Surplus (£bn)

207

137

7

Aggregate funding level

120%

112%

101%

Total number of schemes

4,818

4,818

4,818

Proportion of schemes in surplus

82%

75%

49%

Proportion of schemes in deficit

18%

25%

51%

However, when announcing the plans, the government claimed that approximately 75% of schemes is currently in surplus, worth £160bn.

According to LCP, the only way to reach £160bn in surplus is to count as surplus anything above the ‘low dependency level’ – the level at which a scheme can invest in Gilts +0.5%.

This, it said, is “significantly” more than the £100bn surplus for schemes when measured against the more prudent measure of the cost of buying out the benefits with insurers.

This brings over 1,000 more schemes into scope, and makes much more surplus available for the schemes that were already funded on the buyout basis, LCP pointed out.

David Wrigley, partner in LCP’s investment team, said: “The government’s focus on the £160bn figure is noteworthy, as it suggests a view that surpluses should be available for distribution before a DB scheme reaches full funding on a buyout measure.”

Wrigley said this has the potential to “really increase” the running-on of pension schemes, with the potential for sooner and larger access to surpluses.”

He added that the policy intent is welcome. However, “the devil will be in the detail”, in particular how members will be protected and the extent to which pension scheme trustees are legally constrained in their use of any new flexibilities.

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