Shouldn’t every scheme that is considering buy-out, reconsider the option to run on?

The two most significant measures in the Autumn Statement, impacting the Mansion House reforms are a revision of the guidance to the LGPS pools and changes to tax rules governing surpluses in corporate defined benefit pension schemes.

LGPS interventions – encouragement or strong-arming?

which are expected to consolidate further by March 2025  so that  pools will be expected to be managing at least £50bn by then.

These stronger pools will be expected to increase allocations to private equity with target allocation set at 10% by 2030. This is expected to release a flow of £30bn into private equity. I’m at a Conference of LGPS fund managers today and I’ll be interested to see if they see this as positive or as “strong-arming”.

Surplus extraction – no longer penalised by HMRC

Documents accompanying the chancellor’s Autumn Statement today revealed the Treasury also plans on reducing the authorised surplus payments charge from 35% to 25% from 6 April 2024.

This measure is clearly a challenge to the hegemony of buy-out which has been promoted as the only option for the nation’s Corporate DB Plans

I look forward to seeing the consultation on the details of how this new regime will work and encourage all well-funded schemes to include the option of running on when deciding on their end game strategy.

But we can already see a plan emerging which offers considerable hope that where employers are weak, but surpluses are sufficient, there will be an incentive to keep schemes going. There is even hope for weak sponsors with little surplus. Run-on seems to be being promoted as a viable option for all DB schemes.

A call for evidence that adjustments to funding regulations , gives hope that organisations engaged in supporting and even replacing employer covenants , will be able to challenge the insurers’ buy-out plans. Here’s what the Treasury is saying in Mansion House 2.0.

“It should also be noted that the call for evidence aimed to build an evidence base around introducing new options in the DB pension landscape, alongside other market interventions that are already underway in this space.

The revised funding regulations will make clearer what prudent funding plans look like, make explicit that there is headroom for more productive investment, and require schemes to be clear about their long-term strategy to provide member benefits.

The superfund framework announced by this government will provide an option for employers who want to sever the link with their scheme where the scheme is not funded to levels that enable it to buy-out with an insurer in the short term.”

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Detailed response to the DB Options consultation published.

The Government has published its response to the DB Options consultation and this can be read here.

The key take-aways are the conclusions to the three chapters

The government will take measures to increase investment by DB pension schemes in productive finance whilst continuing to prioritise a strong and diversified gilt market.. We will do so through making extraction of surplus easier, with appropriate safeguards for member benefits, and establishing a public sector consolidator, by 2026.

We will reduce the rate of taxation applicable to authorised surplus repayments to sponsoring employers and introduce measures to ensure surplus can be shared with scheme members. We note the need to ensure safeguards including levels at which surplus can be taken and covenant strength, and the possible benefits of a 100% PPF underpin. We will launch a consultation to consider the detail of these measures this winter.

The Government feel the PPF would be well placed to run a public consolidator addressing a specific market failure. It will establish a public sector consolidator by 2026, aimed at schemes that are unattractive to commercial providers.

The Government will launch a consultation to consider the design of and eligibility for such a consolidator this winter. It wants any public consolidator to support employers with DB schemes while delivering the best possible outcome for members.

Surplus distribution plans

 Peter Cameron-Brown is something of an expert on “surplus distribution” from DB plans. You can read his suggestions – submitted to the DWP here.

The key points from his DWP submission suggesting  “Surplus Distribution Plans” to encourage DB Schemes to roll-on with or without the support of sponsors seem to have been picked up today.  Here are Peter’s views after reading the consultation response

Additional to my original consultation points I think the proposals should consider the replacement of an employer as the Scheme sponsor/guarantor.  If we are talking about Schemes in surplus, it would surely be an attractive proposition for another organisation to assume the employer’s role and permit scheme run-on with long-term investment policies remaining in place.

The use of a Regulated Surplus Distribution Plan would permit a controlled method of providing a return to the incoming sponsor – who might be able to offer continued benefit accrual to Members in some form or another.

Also despite the earlier release of pension scheme surplus (than after buy-out) should the Employer suffer a PPF triggering event, the pension scheme as a company asset which can be used productively by the incoming sponsor should encourage the transfer of the pension scheme as part of the Administration processes.

Perhaps I am describing a commercial consolidator not targeting buy-out, however I do think more could be achieved with an appropriate Regulatory background designed to achieve the best outcome for Members rather than seeking to protect the PPF by encouraging buy-out.

I am therefore encouraged by the Chancellor’s announcements and do hope my suggestion of TPR Regulated Surplus Distribution Plans will be further considered during the consultation stages.

Taken together, the strong-arming of the LGPS, the reduction of surplus extraction tax rates to corporation tax rates and the promise of support for schemes looking to run-on , represents a huge step forward. It will not be welcomed by insurers but it recognises a growing feeling amongst those involved in the management of corporate DB schemes, that buy-out is not the only answer.

This is a long way from the options put forward by the DB funding code. In the context of the Autumn Statement, it is clear why the Code has been so delayed.