Britain’s pension fund industry is backing reported government plans to let companies tap the multibillion pound surpluses that are currently locked up in major retirement funds for employees.
Labour could change the rules to free up some of the £226 billion ($283 billion) of excess funding tied up in the U.K.’s 5,000 defined benefit programs, in an effort to boost economic growth. At least £50 billion could be released for employers to invest in their businesses, the Pensions and Lifetime Savings Association said.
Chancellor of the Exchequer Rachel Reeves is expected to set out the proposals in a big speech on growth on Jan. 29, when she will also pledge to clear planning restrictions and green-light major infrastructure projects to drive private sector investment. A Treasury spokesman said he would not comment on speculation about the content of the speech. Sky News reported the plans on Jan. 26.
Last year, Reeves unveiled reforms to local government and defined contribution pensions to create larger pools of money that can take more risk in a bid to accelerate economic growth. However, the changes will take time while the surpluses in defined benefit funds are available now.
Britain’s defined benefit programs, most of which are closed final salary arrangements where the employer bears the risk, have £1.1 trillion of assets but are largely invested in safe securities with reliable revenue streams. Figures from the Pension Protection Fund for this month show they had a £226 billion surplus above lifetime payment liabilities to retired staff. In defined contribution programs, the staff bear the risk and the retirement pot depends on investment performance.
To release any surplus funds, the government will need to provide cast iron assurances to pension trustees that members’ benefits will not be put at risk. The PPF, the industry lifeboat, guarantees that 90% of entitlements will be paid in the event that the employer goes bust and the pension program is underfunded.
Steve Webb, a former pensions minister now partner at pensions consultancy Lane Clark & Peacock, said the government could either change the PPF arrangement to a blanket guarantee or allow firms to pay a fee for 100% protection. New legislation would be needed to override rules on individual pension programs, he added.
Companies could then release a share of the surplus for their own investment plans. Trustees could also use the funds to improve returns for defined contribution staff, who have less generous terms than those on defined benefit programs.
Zoe Alexander, director of policy and advocacy at the PLSA, said the group backed surplus release so long as the right protections are “in place to ensure member benefits are secure.”
“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 defined benefit assets, including greater investment in U.K. assets,” she said.
The last Conservative government looked into the proposal and even cut the tax rate on surplus payments to 25% from 35%, but stopped short of the broader legislative change that is needed to have meaningful impact. The proposals were put out for consultation shortly before the election was called in May last year.
Pension programs have moved into surplus as a result of higher interest rates and large top-up payments employers made during the 13 years of low rates to 2022. The Bank of England is now cutting rates again, which may deplete the surpluses.
