The Government has set out how it proposes to facilitate access to surpluses in defined benefit (DB) pension schemes and to create defined contribution (DC) ‘megafunds’. It has confirmed that the Pension Schemes Bill will not establish a Public Sector Consolidator for DB schemes.
The DB proposals are contained in the Government’s response to its predecessor’s February 2024 consultation Options for Defined Benefit Schemes. Changes requiring primary legislation will not be consulted on further and can be legislated for in the Pension Schemes Bill, which is expected soon.
Currently, there are three main obstacles to making payments to a sponsoring employer from a DB scheme that is not winding up: scheme rules must allow it; the scheme must remain fully funded on a buyout basis; and trustees must be satisfied that the payment is in members’ interests (a statutory requirement over and above their general fiduciary duties). The proposals address all three:
The consultation response records that many respondents had argued that it would encourage surplus-sharing if one-off payments to members were treated as authorised payments for tax purposes. No proposals are made but the Government is “continuing to consider the tax regime”.
The Government will not mandate how extracted surplus is used, but the response says that “the potential for members to benefit” is “vital to the success of this policy”. Regulatory guidance referencing “a suite of options” is promised.
The idea of schemes opting in to 100% Pension Protection Fund (PPF) coverage in exchange for a higher levy has been rejected.
The previous Government had committed to launching a public sector consolidator (PSC), to be run by the PPF, by 2026 but had not taken decisions about eligibility or sources of reserving.
Today’s consultation response says that legislation to create a PSC will not be in the Pension Schemes Bill. Instead, the Government is “continuing to explore the best approach to establishing a consolidator that could complement the existing market”.
Any PSC would be a “small, focused” one. The Government believes that the case for creating a PSC is strongest in relation to underfunded schemes (with sponsors effectively paying deficit contributions after a transaction and remaining liable for their pension obligations until the deficit is removed), and that there is a “less clear” case for extending its remit to “small, well-funded schemes”. Further work is being done on the underwriting model and on benefit standardisation.
DC proposals are contained in the Final Report of the Pensions Investment Review and in the Government’s response to the Unlocking the UK Pensions Market for Growth consultation. In his forewords to these documents, the pensions minister says that he wants to add to the momentum for DC consolidation and enable “megafunds” to “go toe to toe for investment opportunities with the biggest international pension schemes”. Announcements include:
Adam Boyes is the Head of Trustee Consulting at WTW and a senior scheme actuary, advising large and complex pension schemes on funding and endgame strategies. He has responsibility for driving thought leadership and innovation across the company and representing WTW and our clients on overall pension policy matters within the industry.
Bina Mistry is the Head of Corporate Consulting at WTW with significant experience in advising and implementing innovative and bespoke projects and providing strategic pension advice, including on endgame strategies, surplus management, run-on approaches and alternative solutions. Bina is also responsible for developing many of WTW’s views shared in significant government consultation responses and developing thought-leadership.
