The UK pensions industry has welcomed plans from the Department for Work and Pensions (DWP) to enable defined benefit (DB) surplus extraction and for a public sector consolidator operated by the Pension Protection Fund (PPF).

The DWP launched a consultation on its plans on Friday afternoon, running until 19 April. It is seeking views on how money held in DB schemes can be best unlocked in the interest of savers and for sustainable investment in the wider economy.

The department said that currently, DB pension schemes are enjoying high levels of funding, with many schemes running a surplus. The revised funding regulations, which were laid earlier this week, make clearer what prudent funding plans look like, making it explicit that there’s headroom in the regulatory environment for schemes to invest more productively.

However, it acknowledged that the current legislation makes it “difficult and costly” for many scheme trustees to do this, therefore the government is committed to introducing measures to make surplus extraction easier for trustees.

In addition, the government said that despite improved funding levels and the introduction of superfunds, it believes that opportunities will remain restricted for schemes less attractive to commercial providers and it plans to establish a public sector consolidator by 2026 aimed at schemes unattractive to commercial endgame providers.

The consultation was first announced in the Autumn Statement and builds on a call for evidence on options for DB schemes that ran from 11 July 2023 to 5 September 2023, which was launched after the chancellor of the exchequer Jeremy Hunt revealed the government’s plans to unlock up to £75bn of additional investment from defined contribution (DC) and Local Government Pension Schemes (LGPS) to help grow the UK economy and deliver benefits to savers.

The consultation sought evidence on how DB pension schemes could increase the amount invested in productive asset classes, including the potential role of the PPF.

Minister for pensions Paul Maynard said: “We are in a welcome position with DB pension schemes enjoying high levels of funding, and we want to make this money work harder for savers and the wider economy. I welcome industry views on our plans to reform the pensions market.”

Sir Steve Webb

Steve Webb at LCP

Steve Webb, partner at LCP, said: “It is welcome that the government is moving forward with ideas about the better use of £1.4trn of assets held by DB schemes. The suggestion of a ‘statutory over-ride’ to make sure that all DB schemes in robust financial health could explore options around surplus extraction is a very positive one.”

He said that with regard to surplus extraction, trustees will need more safeguard than a well-funded scheme.

“Our proposal for full PPF cover, backed by a new PPF super-levy, would give trustees comfort that member benefits were fully protected regardless of what happened to the sponsoring employer in future, and could free up many billions of pounds of DB pension scheme assets to be invested more productively,” Webb explained.

Simon Kew, head of market engagement at Broadstone, added that given the drastic improvements in funding levels, it makes sense to enable greater scheme flexibility for surpluses and could deliver significant economic benefits.

He added that any extraction of surplus from a scheme will have a “knock-on impact for member security” and he welcomed that DWP acknowledged this, but agreed with Webb that protecting member benefits must be the utmost priority as these reforms progress.

Kew said the outlined plans for establishing a public sector consolidator by 2026 could open up opportunities for some schemes, particularly at the smaller end of the market. He added that new entrants extended in the market this year will provide further supply for unprecedented de-risking demand.

The role of the PPF

Katherine Easter, interim chief executive officer of the PPF, said: “We welcome DWP’s consultation and look forward to working collaboratively with DWP and industry to establish the best design for a public sector consolidator that delivers the government’s objectives.”

Easter said the proposed consolidator would maintain the security of members’ benefits, give more choice to schemes and, dependent on scale, invest materially more in assets that support the wider UK economy and UK Gilt market.

“Given the £1.4trn scale of the DB sector, we believe the public consolidator can work alongside existing commercial providers, supporting a healthy market by providing an attractive option for schemes unable to access existing solutions on reasonable terms,” she noted.

Easter said that the PPF plans to engage with stakeholders both on the detailed design of the public consolidator and further viable approaches that use the PPF’s skills and capabilities.

She said: “We stand ready to support the government achieve its objectives in any way we can.”

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