Hamilton and the Plowman set out their vision for 10/20 years
Hymans Robertson sets out how government might maximise the potential of DB schemes.
This article in Professional Pensions was inspired by John Hamilton who appears with the Plowman at the top of this blog and will be speaking this morning at 10am at the PLSA.
11 March 2025• 5 min readThe UK’s defined benefit (DB) pension schemes hold over £1trn in assets, largely concentrated in the largest schemes. The UK government’s surplus extraction plans aim to unlock some of these funds to generate investment in the UK – with an estimated £160bn in surplus capital available for reinvestment.
While DB schemes hold an estimated £160bn in surplus capital a shift towards growth-oriented assets over the next decade could unlock more than £150bn in growth assets, and generate a further £100bn in surpluses – bringing total potential investment to over £400bn.
However, while it is positive to see the government is actively considering this now, to reach this huge goal over the next decade, several key reforms need to be met – with numerous challenges needing to be carefully managed.
1. Legal barriers restricting surplus distribution. Many scheme rules make surplus distribution difficult. A statutory override in the Pensions Bill could allow trustees to return surplus to employers, reinvest in UK growth, or enhance member benefits without excessive regulatory hurdles.
2. Protecting member benefits while unlocking investment. With over £1trn in liabilities, any reform must preserve accrued benefits. Many companies recall past surplus-driven contribution holidays, followed by years of financial strain and deficit payments.
One area being considered is the threshold for sharing surpluses outside of a scheme, which is currently set at a buyout level. Many believe the government is moving towards a refresh of this to be set at the low dependency objective (LDO) level going forwards. If such a change was made, there is a question as to whether a level of risk or buffer should be incorporated into the new threshold. Either way, schemes should have the flexibility to retain higher buffers above LDO where needed to reflect the risk inherent in their scheme and their risk appetites.
3. Aligning regulation with long-term growth. Trustees need clarity that investing in UK growth assets, in a balanced and measured approach, aligns with fiduciary duty. Further, section 37 of the Pensions Act 1995 should be amended so that trustees assess whether surplus distribution is “not materially adverse” to members interests.
However, even with this clarification, some trustees will likely remain hesitant due to the prevailing belief that buyouts provide the most secure outcome for members, even though a well-managed run-on strategy is able to materially improve financial outcomes for members. One example is that those schemes without full inflation-linked benefits could use surplus funds to improve member benefits and enhance retirement security.
4. Updating the Pensions Act 2021 to encourage “run-on” strategies. Restrictions introduced in the Pensions Act 2021 can deter well-funded schemes from running on, pushing employers towards buy-outs. There should be further clarifications to provide confidence in:
- Allowing more flexible surplus management so funds can be used for benefit improvements, employer reinvestment, or UK growth, particularly where the statutory override is used and with mutual consent
- Easing corporate activity restrictions, allowing schemes to run on without unnecessary regulatory intervention.
5. A shift towards growth assets without excessive risk. UK DB schemes help stabilise the financial system by holding around £500bn in gilts, however as many are typically held as leveraged investments, the exposure is closer to £1trn. As more schemes run on rather than buying out, long-term confidence in UK gilts can be maintained.
In comparison to where we’re headed, with many schemes continuing to de-risk, a gradual shift towards generating surpluses and a change of 2% per year towards growth and productive finance could unlock hundreds of billions, without excessive risk. Even a modest reallocation each year of this amount could boost economic growth while maintaining pension security.
6. Strengthening the Pension Protection Fund (PPF) as a safety net. The PPF’s £13bn surplus could support a more balanced approach to risk. A key step could be ensuring pensions remain protected upon PPF entry, increasing trust in sustainable risk-taking.
However, relying on the PPF as a backstop should not be the default—schemes need clear funding safeguards to manage downside risks proactively.
7. Addressing practical investment challenges. Pension schemes face barriers when investing in growth and productive finance assets, including liquidity constraints and governance complexity. These issues have somewhat limited investment to large, specialist institutions—the main drivers of reform. Making these assets more accessible to all schemes is key, for example through utilising the National Wealth Fund, with a clear focus on UK investment.
8. Creating the right incentives to mobilise capital. Many trustees and advisers still view buyout as the safest option, limiting incentives for running on. While buyout remains the right path for some, should there be stronger incentives for schemes to run on?
For instance, tax treatment does not encourage DB schemes from growing and reinvesting surplus. To encourage a greater number of schemes running on, the government could introduce full tax relief on surplus funds reinvested in UK infrastructure, productive finance, or pensions.
Conclusion
It is clear the potential for unlocking DB pension surplus represents a once-in-a-generation opportunity to mobilise more than £400bn for the UK economy while enhancing member outcomes. At first glance this feels like a no brainer and a sure-fire win-win for the economy; yet for employers and members a clear plan of action is needed to ensure this promise lives up to the hype and this can really be delivered.
A statutory override, targeted tax incentives, and regulatory clarity can help DB schemes drive UK economic growth, innovation, and infrastructure investment. Further, a balanced run-on approach benefits employers and members, offering greater financial security and better retirement outcomes for individuals with DB and DC pensions. This will support better adequacy at retirement for the current pensioner generation, as well as the current working generation in the UK.
UK pension schemes can play a transformative role in shaping the future of the UK economy. However, swift action is required, with around £40-50bn per annum being insured in recent years, there is a narrow window to enact change – and it is closing.
Sachin Patel is head of corporate DB endgame strategy at Hymans Robertson
The views within this article have been formed within Hymans Robertson and in discussion with key stakeholders in in the industry. One main contributor to these views is Stagecoach Group Pension Scheme chair of trustees John Hamilton.
Signed off by someone at HR who calls himself “head of corporate ENDGAME strategy”.
Where are the consultants who’re brave enough to describe their strategies as “run on” or “ongoing”?
I know I’m an old fogey in pensions terms, a 20th century trustee who should stay retired, and I shall … but these HR points strike me as being timid in nature, clinging to security (a balance sheet approach) rather than investing the consultants’ time in cash flow forecasting and budgeting, investing (which requires diligence, hard work, never easy) rather than asset placement “strategies”.
PLSA spring conferences have a tendency to take place as equity markets (perhaps ramped up before Christmas) are sliding down temporarily.
Plus ça change, plus c’est la même chose.
With a balance sheet obsession that means myopic consultants may only see emerging deficits or squeezed surpluses.
Good challenge on the nomenclature and being bold Derek!
I have found that to move the crowd you have to speak their language.not be too different. Balance sheet language pervades.
We must be bold but we must also bring people with us. Hard balance. Not saying we’ve got it right. But Sachin’s title reflects that balance!
The cashflow forecasting I agree with 100%. To let go of balance sheet altogether is to embrace the possibility of failure. I feel we are not ready for that even though you might expect a better future for it.
Calum
If I accept for now your preference for the art of the possible rather than a more radical approach, your firm’s proposal still
parrots a Government claim
of “… an estimated £160bn in surplus capital available for reinvestment.”
Really, Calum?
It’s based on 30.9.24 TPR roll forward data of
total DB assets of £1.240tn and
Low Dependency liabilities of £1.103tn, with TPR estimating
75% of DB schemes “in surplus”.
Professor Iain Clacher and Con Keating in an earlier blog on here
think those TPR liability estimates may be low by about £70bn and the TPR asset estimates may be high by about £79bn, with maybe 47% of schemes in surplus, not 75%.
That seems to illustrate how “ephemeral” balance sheet estimated “surpluses”, which are now nearly six months old, can seem.
Clacher and Keating concluded their comments by saying:
“This analysis challenges the widely held narrative that scheme surpluses are large enough, if made freely available, to make a material contribution to the investment problem. We do not believe they are.
“By contrast, abandoning the pervasive culture of derisking and encouraging all schemes to invest fully in a diversified and productive manner would make the kind of difference that the Treasury is looking to achieve.”
If you don’t know who has the risk then it is you.unless your benefit is underwritten by the tax payer.
Agreed in DC-land, although CDC has a form of pooling.
More complex in DB-land, much depleted tho’ it is these days, where the risk is shared among the sponsor(s), the PPF and ultimately the member if there is a haircut along the way.
But I’m sure you know this, John.