At a meeting being held today (28 January 2028) the UK prime minister, Keir Starmer, and chancellor Rachel Reeves, will sit down with leaders of Britain’s biggest businesses in the City of London and will outline how restrictions will be lifted on how well-funded, occupational defined benefit (DB) pension funds that are performing well will be able to invest their surplus funds.
This follows action taken by the government last week to bring a renewed focus on growth from some of the UK’s biggest regulators, a shake-up to legal challenges on planning applications, and new “brownfield passports” to speed up housing in commuter hotspots.
In a statement, Starmer said: “To achieve the change our country needs requires nothing short of rewiring the economy. It needs creative reform, the removal of hurdles, and unrelenting focus. Whether it’s how public services are run, regulation or pension rules, my government will not accept the status quo. Today’s changes will unlock billions of investment, pushing forward in delivering my Plan for Change.”
Reeves added: “I know this government and businesses are united on growth being the top priority for our economy, which is why I am fighting every day to tear down the biggest barriers to growth, taking on regulators, planning processes and opposition to this urgent mission.”
Working together
The duo is expected to tell CEOs that the government is seeking to create “the best possible conditions for the private sector to thrive”. “They will promise to work in partnership with businesses, to deliver high-quality jobs across the country, and the economic growth that will fund the schools, hospitals and roads that we all rely on,” according to the statement.
Pension trustees and the sponsoring employers could then use this money to increase the productivity of their businesses – to boost wages and drive growth or unlock more money for pension scheme members.
Where trustees agree to share a portion of scheme surplus with a sponsoring employer, the employer may choose to invest these funds in their core business, for example to purchase equipment or supplies, and/or provide additional benefits to members of the pension scheme, it added.
Unlocking surplus
Approximately 75% of schemes are currently in surplus, worth £160bn, but restrictions have meant that businesses have struggled to invest them.
These reforms build on the chancellor’s Mansion House reforms which will create pension mega funds as part of the biggest set of pension reforms in decades, unlocking billions of pounds of investment in exciting new businesses and infrastructure and local projects.
Over £1.1trn is held by pension funds in the UK and defined contribution (DC) pension schemes are set to manage £800bn worth of assets by the end of the decade.
“This government is determined to encourage these pension funds to deliver investment and drive economic growth – which is the only way to make people better off,” the statement added.
Ambitious mindset over risky business
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Saving Association (PLSA), said: “The PLSA backs surplus release, with the right protections in place to ensure member benefits are secure. Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers’ defined contribution workplace schemes.”
She added that by lowering the legislative threshold to allow returns of surplus could potentially encourage trustees, in conjunction with their employers, to adopt a more ambitious mindset and take on slightly riskier investment strategies for their DB assets, including greater investment in UK assets.
Barnett Waddingham partner and head of DB endgame strategy Ian Mills believes that the current rules have created an artificial incentive on DB schemes to de-risk at any cost.
“That has led to value destruction on a colossal scale,” he said, adding that DB schemes “invest overly prudently, starving the UK economy of the capital it so desperately needs to grow”.
“At the same time, most schemes currently insure as soon as it’s practical to do so, transferring an enormous amount of value from the corporate sector to the insurance markets, especially for those schemes that are still quite immature,” Mills continued.
“Reforming the rules in the right way would be to the benefit of all key stakeholders. Companies will be able to access surplus funds locked-up in their schemes and members will have the opportunity to share in that, increasing their benefits,” he said.
“The rhetoric for the government is clear – there are billions of pounds in pension schemes which should and could be used”
David Brooks, head of policy at Broadstone
David Brooks, head of policy at pensions consultancy Broadstone, noted, however, that the big challenge will be the range of risks and opportunities that the proposals will present.
“The idea of run-on will become more enticing but TPR [The Pensions Regulator] and PPF [Pension Protection Fund] will be keen to protect member security and minimise covenant risk. For smaller schemes, the costs of running the scheme indefinitely may outweigh the gain to be made from investment return,” he explained.
Brooks added: “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.”
DB scheme surplus
Currently, DB scheme surplus can only be accessed where schemes passed a resolution by 2016, so not all schemes can access surplus even if trustees and sponsors both want to do so.
Legislative changes could enable all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement. This allows trustees to assess the suite of options available in striking a deal with employers on how best scheme members can also benefit – linked to improving member outcomes.
Trustees have an overarching fiduciary duty to act in the best interests of their members. When considering surplus extraction, trustees must fund the scheme and invest its assets in a way that leads to members receiving their full benefits.
Future plans
Later today, the chancellor will make a speech where she will set out plans to push through further planning reforms to “get Britain building again, rip up regulatory barriers so we can encourage more investment into the UK” and announcements to boost trade and investment.
The government will set out the details of the surplus policy in its response to the Options for Defined Benefits consultation, due this spring.
No comments yet