Billions in pension surpluses “to be unlocked” – but what are the upsides and downsides for savers?

June saw new proposals from the Government setting out how tens of billions of pounds in DB pension scheme surpluses could be released. But – if the plans do go ahead – how well will savers be protected? And what are the potential upsides?

By Tony Watts OBE

Rising stock markets in recent years, along with gilts enjoying good returns mean that funding levels for Defined Benefit (DB) pension schemes are currently in their strongest-ever financial position.

In fact, the number of schemes in surplus has quadrupled over the last five years, so for most schemes their assets now exceed the value of promised pension benefits.

Approximately 3,790 DB pension schemes are currently in surplus in the UK, almost 4 out of 5, holding an aggregate surplus total of £258.5 billion – roughly one-twelfth of the entire UK annual GDP.

Seeing that sort of money sitting around has come to the attention of the Government who are certainly keen to see pension savers get more from their investments… but have also been promoting the idea that investing more of our pension funds into the British economy would be a jolly good idea too.

This concept of investing more of our pension funds into the broader economy, readers may recall, began life under then Chancellor Jeremy Hunt in his 2023 Mansion House speech, and (after a bruising passage through Westminster) emerged in a somewhat less ambitious form earlier this year.

Making more use of DB surpluses takes part of that idea forward… but also puts other options on the table on how to spend the money.

So what will the new proposals mean for savers?

They come after a lengthy consultation process by the DWP with industry leaders and even older people’s representatives like myself.  The next round of consultations is now in progress, and trustees of schemes in particular are parsing the proposals – as a lot of the responsibility of deciding what to do will fall to them.

If they deem that the fund they supervise is in a strong enough position to release a surplus, they can:

• Release funds directly to employers to invest in business growth, pay down debt, or fund current employee pensions.
• Increase benefits to members, for instance by augmenting scheme benefits.
• Make lump-sum payments directly to members over the normal minimum pension age (typically age 55).
• Fund contribution holidays.
• Make higher allocations in risk assets.

The consultation will run for 12-weeks and the new regime, including any amendments, is expected to be in place from April 2027.

The challenge for trustees, of course, is to ensure that future payments to all scheme members will be protected against future shocks. Historically, investment values do not always follow a neat upwards trajectory.

So how have the proposals gone down within the pensions sector?

By and large, fairly well, with many viewing them as “bolder than expected”. However, it’s fair to say that many trustees remain cautious – after all, releasing funds will be done under their aegis. Putting transparent regulations in place, alongside robust protections to guarantee member security, will patently be key.

Alex Pocock, Managing Partner at Barnett Waddingham summed this up in his response: “Improved funding positions mean most trustees now have more options on the table.

“The surplus proposals are a positive step forward, but trustees will still need the confidence to make use of these new flexibilities while remaining aligned with their fiduciary duties. As more schemes weigh up these options, balancing member, sponsor and trustee interests will be critical.”

The changes also mark a significant shift in how and where employers can put their contributions as well as their employees.  What might they want to do with this opportunity?

Calum Cooper, Head of Pension Wealth Strategy at Hymans Robertson said:
“For a generation, the rules were designed to trap surplus money inside schemes to protect members from corporate insolvency.

“Flipping that script to allow employers and members to share the upside while schemes are ongoing completely changes the economic equation of running a DB scheme.

“Sponsoring employers will now see a pension fund not as a legacy risk to be offloaded as quickly as possible, but as a corporate asset that can actively fund their business growth or improve current employee benefits.”

That could well lead to few pension scheme buy-outs, at least in the short term.