The budget has been described by some pension people as “boring” though that description will not fit well with those who have charge of corporate budgets who now have to factor in an extra cost equivalent to that of auto-enrolment from April 2025.
Many of the large corporates who will have the heaviest costs from the national insurance increases have DB pension schemes which are now in surplus. This may be described as an accident of Government policy, when we had true austerity , the gilts-based discount rate on pension scheme liabilities made DB schemes look impecunious. In these days of tax and spend – with the long term gilt rate back above 4.5%, pension scheme liabilities are cheap and even though assets are diminished (from the LDI sell-off) many DB schemes have surpluses.
The Government is said to have a plan to allow employers to access those surpluses to grow their businesses. This is, according to the Times, the Mansion house “II” agenda.
Unlocking the Local Government Pension Scheme to allow further productive financing of the UK economy is almost a given, having been flagged in a recent Treasury consultation , but corporate defined benefit pension schemes have so far been “off limits”, not even a consideration for Emma Reynolds current pension review. The Times now report that
Some City sources also want to free up the £225 billion of surpluses held by old-style company final-salary, or defined-benefit, schemes — which, provided there is clear regulation, could be put to use in the economy.
The irony is that these surpluses are the product of the growth agenda and had the growth trajectory that Britain was on till the financial crisis of 2008 continued, we would not have had the need for leverage in the LDI that dominated pension funding in the 14 years leading up to the 2022 blow-up. We may in time have the perspective to see that the way assets were valued , not the way they were managed, was the cause of DB pension schemes retreating from the UK growth agenda to which they are now being urged to return.
While ideas for freeing up pension surpluses were considered by the previous government, proponents are now stepping up their calls for reform. Serkan Bektas at Insight Investment, one of Britain’s biggest gilt investors, said: “When the government is talking about investing and having a growth agenda, defined-benefit pension funds can very directly contribute.”
It is a deeper irony that calls for reform are coming from Insight, the market leader for LDI, I couldn’t agree with Serkan Bektas more (I suspect that Insight has now worked out that it needs to see a fit and healthy DB sector running on for sound commercial reasons!)
The responsibility for pension funds holding a surplus has traditionally been transferred to insurance companies, but some City figures are pushing for these funds to take more control of the surpluses themselves. Then they could be used not only to invest in the economy, but, potentially, to boost payouts to pensioners as well.
Firms like Insight, with their gilt management teams to the fore, can see the menace of insurance and don’t like it. I suspect they are on the same page as the Treasury. Bulk annuities do not use Government but higher yielding corporate debt to match and there is precious little scope for an insurer’s investment team to get involved with productive finance.
BTW; I do enjoy the received wisdom that insurance companies are the “traditional” beneficiaries of pension scheme surpluses. Even the ABI may feel a little embarrassed by that gem!
The Times continues
But there would have to be a bigger backstop from the Pension Protection Fund, the industry lifeboat that plugs shortfalls when companies collapse, as well as strict regulation on the way in which surpluses are released.
This hints at what the Pensions Regulator calls “Capital Backed Arrangements” where private markets come up with the backstop capital to strengthen the covenant and satisfy TPR there is a “double covenant” to meet pensions and allow the surplus to be spent elsewhere.
The hope is that once the surplus is released , there will be sufficient to allow the sponsoring company to invest for the future. Judging by some of the comments I’ve heard from pension managers and financial controllers, the surpluses will be needed to keep corporate DC pension promises afloat.
Some City sources also want to free up the £225 billion of surpluses held by old-style company final-salary, or defined-benefit, schemes — which, provided there is clear regulation, could be put to use in the economy.
• Seven things from the budget you might have missed
While ideas for freeing up pension surpluses were considered by the previous government, proponents are now stepping up their calls for reform. Serkan Bektas at Insight Investment, one of Britain’s biggest gilt investors, said: “When the government is talking about investing and having a growth agenda, defined-benefit pension funds can very directly contribute.”
The responsibility for pension funds holding a surplus has traditionally been transferred to insurance companies, but some City figures are pushing for these funds to take more control of the surpluses themselves. Then they could be used not only to invest in the economy, but, potentially, to boost payouts to pensioners as well.
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But there would have to be a bigger backstop from the Pension Protection Fund, the industry lifeboat that plugs shortfalls when companies collapse, as well as strict regulation on the way in which surpluses are released.
While Rachel Reeves may be eyeing the £225bn surplus to grow the economy, many businesses will be seeing their pension surplus as their payroll lifeboat.
When MPs have a DC pension to replace the 1/40th plus benefit
scheme will they feel the reality of what they do.
Regrettably the budget tax hike was required but will take a generation
to repair the productivity per capita and they will only get one Parliament
before the U.K. returns to borrowing to fund taxation.
The pain will be for nothing.
BOE needs to cut rates now.
Interesting how the view that surpluses are to be returned for investment. Surely for consistency the surplus should be subject to a 40% tax charge like DC surpluses are to be after 2027 ( or is it from 2027)
At present without change in legislation the DB pension scheme surplus can be used to reduce future employment costs (and to offset the employer NI hike) by reopening or keeping open the pension scheme to DB accrual. The 1970s and 1980s history of contribution holidays could therefore return. This would be sustained by a growing asset pool achieved by investment policies freed from the shackles of anticipated scheme failure plus new auto-enrolment contributions being paid for a defined or targeted pension in retirement to permit the sharing of the surplus between the employer and the members. (You can design a DB pension benefit which mirrors CDC under current auto-enrolment regulation, namely an average salary scheme with discretionary benefits as is being targeted by the USS).
Provided the release of the surplus to fund current contributions is controlled, there should be no need for the continuing employer to share the investment return with a capital provider. The embedded scheme surplus makes the pension scheme an asset that could boost the share value of the employer, even that of a distressed employer, or to a consolidator/capital provider running the Scheme out or preferably to continue as an occupational pension scheme including non current employees of the sponsor.
From the Members point of view there is no disadvantage from having a number of defined benefit pensions in payment or accrued (unlike the need for consolidation in the DC arena). Indeed having multiple defined or target pension rights lowers risk. It is the employer that ultimately bears the administration costs. Pensions dashboards please note!