In case the Pension Security Alliance (aka Just and PIC insurers and John Ralfe) are still worrying you, here is the proposal from the Government of the Pension Schemes Bill , as Mary McDougall explains out in her article.
Only 5 per cent of an estimated £160bn of excess assets held in defined benefit pension schemes will be extracted despite a change in rules to make releasing surpluses easier, the government has predicted.
The Department for Work and Pensions estimated in an impact assessment that “around £8.4bn” of surplus after tax would be returned from schemes to workers and companies over 10 years as a result of new rules tabled in this week’s pensions bill.
The reason that pension schemes have surpluses is because they contributed so much in “deficit” payments in the years of austerity when regulatory measures depressed seeming funding levels. Now these contributions are visible as surplus thought much of them were blown in September 2022. Giving excessive contributions back to schemes who have managed investments well is what the Government wants to do.
The Government’s idea is to allow money to be withdrawn from a level know as “low dependency solvency” rather than buy-out (see below). This would increase today the amount of money available to employers from DB pensions from £97bn to £160bn.
I checked the Impact Assessment , this is the Government’s most important analysis of its proposals as its done by their Treasury . The information gleaned by the FT starts around page 375 and the key table from which the £8.4bn is extracted is on page 387.
The total amount taken from schemes will be £11bn, this reduces to £8.4bn after direct and indirect costs of surplus are taken out.
It can be done, it won’t be cheap or easy,
The Government and its Regulator are not going to do it in a hurry, unless pressure is put on them by those who understand – speaking out. Here’s one!
Steve Hodder, partner at consultancy LCP, said “£8.4bn is low and disappointing”
Under the current rules, a surplus is only accessible if it exceeds the level needed for a business to sell its pension scheme to an insurer, known as a buyout. Rules laid out in the bill will lower this threshold to one of “low dependency”, making an estimated £160bn of surplus assets accessible across all schemes compared with £68bn on the current buyout basis. The rules are not due to be in place until the end of 2027, according to the Roadmap produced by the Government.
Those pension schemes that did not introduce a resolution under section 51 of the Pension Act will be able to unlock their scheme.
But these changes will only be available once we reach the end of the road (see below). The end of the road is 2028.
Employers can have their money back but not much of it and not for some time!
Too long a wait, say the PLSA
Mary McDougall in the FT has spoken to others..
“[The government] could be more aggressive . . . if they got it through in 2026, that could make a bigger difference,” said Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Association trade group, noting that the impact would decline over time as more schemes move to buyout.
Here is the timetable produced by the DWP
It is difficult to understand , both for Superfunds (which now seem to include capital backed journey plans and merged funds) and for super-over funded DB plans, why there needs to be a 3 year wait.
There are plenty of instances of pension rules being changed much more quickly and it is time that the Pensions Regulator’s “surplus guidance” and “regulations” be speeded up or done away with.
Instead, we look like the Government has designed a system that will please the insurers who will do very nicely out of these surpluses. So will the consultants who support “de-risking” through lock down in bulk purchase annuities.
Many employers will not wait and will buy-out. The final word of the FT article is with PWC
“There’s a reality that you are still in a place where most trustees are on the path to getting schemes to insurance companies,” said Gareth Henty, head of UK pensions at consultancy PwC.
If the same ongoing buy-out is what comes out of the Pension Schemes Bill, it will – as Steve Hodder says – be disappointing.
Firstly I would like to draw attention to my October 2023 blog https://henrytapper.com/2023/10/25/why-have-a-surplus-distribution-plan-peter-cameron-brown/ and the associated Pension Playpen discussion. Since then I have refined my thoughts as will become clear from the following.
The new powers in the Bill are purely to give Trustees power to change the Scheme rules to allow them to refund surplus to employers if they believe to do so is in the interest of the members of the Scheme (NB: in most cases not the current employees of the Company) if they do not already have that power. The 2024 consultation stated that “Respondents to the call for evidence suggested that the major barrier to surplus extraction is that many scheme rules prohibit trustees from extracting surplus.” Subsequent discussions with many trustees indicated that the majority already have the power to distribute surplus to the employer, although this may subject to restrictions in the Deed. Certainly in 2016, pension schemes legal advisors were not slow in coming forward in publicising the need to pass a resolution to confirm the power, so the power was not accidentally lost by active trustee boards. It is therefore likely the respondents to the consultation were those with a vested interest and this has biased the significance.
In practice the most likely target is the smaller schemes long established in a different era and closed many years ago who are quite happily running out with minimal administration (and cost) where the surplus would become available anyway “when the last member has left the scheme”.
Given many trustees already have the power, few have used it. The Options for DB Schemes stated “HMRC analysis suggests around £180 million in surplus has been extracted over the 5 year period between March 2018 to March 2023.” This includes and may mainly consist of surplus distributions after buy-out. While this small figure is likely to be due to the excessive Technical Provision and Solvency liability measures applied and high insurance company risk transfer pricing during this period, it is hardly an indication of a large pent-up demand.
Thirdly, the headline £160BN figure has been widely ridiculed in trustee circles, and indeed the Impact Assessment’s figure of £8.4BN over 10 years (half of which it suggests should go to members) was anticipated in discussion forums I attended.
My conclusion therefore is that this is very much a “red herring” proposal designed to assuage a vocal interest group and it will have very little impact on employer’s and the UK economy’s growth prospects.
The real question is how should the £1.2TN assets in private sector DB pension schemes best be used to not only guarantee the retirement incomes of the existing members, but also to enhance the future growth prospects of the employers and the current and future workforce. While there are short term cash flow (and possibly enhanced accounting asset recognition) benefits from employer’s moving the surplus into the DC pots (whether within the same scheme or elsewhere) of current employees, the assets transferred are lost to the employer for its future growth prospects. The obvious answer is already in the employer’s capacity, that is to re-open a new section within the existing DB scheme, providing a level of guaranteed benefit that it is confident of being able to fund over the long term. The current and future employees are then reassured on the expected retirement income guaranteed by the existing scheme asset base, further employer and employee contributions, and their investment prospects, as well as an underlying PPF protection; all of which are not guaranteed in a DC arrangement.
The DWP figure of £160 surplus for schemes in surplus is based on a TPR estimate (£162 billion) as at September 2024. This is based on an unreasonably low estimate of liabilities at time – that liability estimate was carried forward from their lowering of scheme liabilities by £140 billion when perhaps £48 – £50 billion was warranted. Our estimate of the surplus of schemes in surplus on this low-dependency basis was £71 billion at that date.
The idea that buy-out remains the route of choice for schemes is questionable. If we choose to run on and are 130% funded, then we can pursue high growth investment strategies. A simple numerical example will illustrate. Let us suppose that hedging assets have 10% volatility and growth assets 20%. Now the standard consultant advice is to invest to hedge the liabilities and use the excess to invest in growth. That would be £100 at 10% and £30 at 20%, assuming perfect correlation between them. If the one standard deviation risk occurs the scheme is still 114% funded.
But if we invest the entire fund in growth assets, and this one standard deviation loss occurs, the scheme still has sufficient (£104 billion) funds to pay the pension liabilities in full.
making that simple illustration more realistic by having liabilities decline in some relation to the hedge asset fall and a less than perfect correlation between growth and hedging would improve the relative funding level.
I will add one further comment – overall scheme assets are assumed to be £1.2 trillion, which the PPF now makes less than £1.1 trillion – our most recent modelling has the overall assets as slightly less than £1 trillion.
Such growth investment strategies highlight the folly of TPR’s low-dependency asset allocation ‘guidance’.
We’ve had surplus refunds before, between 1987 and 2006. How much was actually extracted, I don’t know; does anyone? Whatever they say in public, are refunds really compatible with TPR’s risk aversion? If any surplus is extracted, I suspect that the trustees would be pressurised to invest in gilts, which worked so well with ILGs (https://www.discrate.com/ldi_for_dummies.htm), which would increase the sponsor’s burden later on, a bit counter-productive.
Over 15 years [Q2 2009 to Q3 2024, 2 quarters missing], I’ve looked at UK private sector employers’ DB pension contributions. The total paid was £436.3b of which special contributions accounted for £197.1b (82.4% of normal). My rough estimate is that at least £131b (private sector alone) was misallocated in UK (www.discrate.com).
Were I still a pension scheme trustee being asked for a surplus refund, I hope that my co-trustees would agree that we need the sponsor to provide robust stochastic evidence at their expense.
The trouble with this is, there is no surplus of funds in a DB Pension Fund until the last living member with a pension from the fund, finally dies. So, are the government planning to continue paying the pensions according to the fund rules, of all remaining members of a fund who have taken part in such a scheme? Are the insurers who have taken over Pension Fund “surpluses” going to make the same guarantees? Or will the attitudes be, as I suspect, ‘hard luck”? How do we get across to the government that pension fund surpluses only exist once the last member has died and the fund is closed? Or, as I suspect, are we looking at a proposal that has insurers rubbing their hands with glee at the prospect of large increases of in their funds at no cost to themselves? All I have read about it makes me sure that companies who guaranteed their staff a pension on retirement, and all former workers who have such a company pension should be screaming at our government to stop this proposal now!!!