Defined benefit (DB) pension scheme rules are set to be overhauled in an attempt to encourage large employers to reinvest surplus funds and even boost staff wages.
In their latest attempt to foster economic growth, prime minister Keir Starmer and chancellor Rachel Reeves , have proposed lifting restrictions on how well-funded occupational DB pensions that are performing well can invest their surplus funds.
Under the proposals, pension trustees and the sponsoring employers could use the extra money from fund surpluses to boost their businesses.
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Starmer said the move would “unlock billions of investments.”
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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.”
It comes after the chancellor used her Mansion House speech to launch pension megafunds from local government schemes to back infrastructure projects.
Here is what the DB scheme changes could mean for you.
How are DB pension scheme rules changing?
There are currently restrictions on how DB schemes can use their surplus funds.
This is to help avoid pension scandals of the past. The most high-profile example is Robert Maxwell, who raided the pension fund of the Mirror Group in the 1980s, putting people’s retirement at risk.
There are now rules on how DB pensions are funded and how they can be accessed. But the government wants to relax some of the rules to make better use of surplus funds.
Schemes are now better-funded and many surpluses have been boosted in recent months by rising gilt yields. Approximately 75% of schemes are currently in surplus worth £160 billion, according to the Pensions Regulator.
The government argues that restrictions have meant that businesses have struggled to invest these funds.
By letting trustees share a portion of scheme surplus with a sponsoring employer, the funds could then be invested in the core business.
The aim would be to boost growth by putting more money into the economy.
This could involve purchasing equipment or supplies to help a business grow or by increasing wages.
The risks of relaxing DB scheme rules
Many DB schemes have closed in recent years as they are expensive for employers to fund.
There is an argument that encouraging access could deplete the pots further and incentive risk-taking. But the proposals have received support so far, with caveats to ensure schemes remain well-funded.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Saving Association, 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.
“Lowering the legislative threshold for allowing 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.”
With around £1.1 trillion in assets, DB schemes already make a significant contribution to the funding of the UK economy and public services, said Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association.
He added: “With the right guardrails in place, the government’s proposals could help channel more funding into the economy, by enabling schemes to invest more widely and take on greater risk, while allowing for members to receive an uplift to pension benefits.”
But other commentators are more cautious.
Chris Ramsey, chair of the DB committee at the Society of Pension Professionals, said it makes sense to make it easier to return surpluses to employers that wish to do this in some circumstances.
But he added: “The proposals are not without risk. Any extraction of surplus could reduce the security of member benefits. As a result, the proposals need to be very carefully considered to ensure an appropriate balance is maintained.”
Rachel Vahey, head of public policy at AJ Bell, said Maxwell and other historic pensions scandals still live long in the memory and it’s imperative we don’t forget about the pension saver at the heart of this revolution.
She said “Trustees have an important role here. They need to be gatekeepers to the surplus, to make sure it is only handed to employers where the members’ financial future isn’t compromised.
“But they could find themselves caught in the crosshairs, facing pressure from employers on one side to release funds, whilst meeting their number one objective to protect pension scheme members on the other.”
Vahey cautioned that surpluses won’t last forever, adding: “There is no doubt a healthy surplus has built up in many DB schemes, thanks partly to the rise in long-term gilt yields which has led to a reduction in liability values.
“But there is no guarantee these clement financial conditions will continue, and if employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme.
“The government risks playing fast and loose with people’s financial later lives. It’s imperative that protection is built into any changes to prevent any future Maxwell-style raids on people’s pensions.”
