LONDON, 3 July 2023 – If policy made it easier for defined benefit (DB) pension scheme surpluses to be put to use, the resulting changes in investment strategy could help deliver the Government’s objectives around productive investment, according to a new white paper published today by WTW.
The paper, entitled Six changes to seize the DB pension surplus opportunity, is published ahead of the Chancellor’s imminent Mansion House speech, which is expected to outline proposals for getting more UK pension savings invested in productive assets.
WTW argues that, where DB assets are concerned, this will only be achieved if some schemes adopt different objectives; schemes would invest differently if fewer were looking to transfer their liabilities to an insurer as soon as possible and if more were instead seeking to generate surpluses. It should therefore be made easier for schemes to use surpluses to benefit pensioners, sponsoring employers and current employees, so that they see value in pursuing higher investment returns. This would also allow surpluses that have emerged already to be utilised sooner.
WTW proposes six key changes the Government should make to pensions legislation:
Rash Bhabra, Head of WTW’s UK Retirement business, said: “With DB members getting older, and less time left until pensions need to be paid, there is no going back to the days when schemes routinely invested mostly in return-seeking assets. Proposals for change that are not realistic about this risk flying too close to the sun.”
“But, with almost £1.5 trillion of assets in private sector DB schemes, it would only take a minority of schemes choosing to keep a small proportion of their portfolios in return-seeking assets for longer to have a big effect. The resources available for productive investment could be tens of billions of pounds higher than if schemes continued on their current path.”
"The current regulatory framework incentivises schemes to predominantly de-risk once they are well funded, rather than continue to invest more productively. Our proposals are aimed at shifting that balance. The key is to change the environment schemes operate in, so that there is seen to be value in generating surpluses that can be used to benefit employers, pensioners and current employees saving through DC schemes.”
“For example, one reason why few well-funded schemes have helped pensioners affected by high inflation is that employers have been reluctant to sanction pension increases that will affect pension values decades into the future; so it should be possible to give pensioners one-off lump sums. Employers will also be more comfortable supporting strategies that could see a scheme become over-funded if they can access some of the surplus sooner and without a tax penalty.”
“Most schemes are already in surplus even on the cautious basis that they were supposed to be working towards over the coming years. So there is an opportunity to put some of this money to use now. By making clear that this is acceptable, which current draft regulations do not, the Government could give employers and trustees an appetite for pursuing further surpluses.”
“Employers, pensioners, employees saving in DC schemes, and the wider economy could all benefit if the Government makes the right policy calls.”
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