Defined benefit pension reform will spur limited UK investment, officials warn

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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 estimates come after Prime Minister Sir Keir Starmer in January said the changes would help unlock a wave of investment to “boost wages and drive growth or unlock more money for pension scheme members”.

He said three quarters of corporate DB schemes were in surplus, collectively worth about £160bn.

Steve Hodder, partner at consultancy LCP, said “£8.4bn is low and disappointing”.

John Ralfe, an independent pensions consultant, added: “It completely undermines the part of pensions policy that was supposed to be the sexiest and with the most immediate impact.”

The proposed rules make it easier for the trustees of well-funded schemes to work with sponsoring employers to return some assets that are in excess of what is required for schemes to meet their pension obligations.

DB schemes are funded by employers and their staff and pay fixed pensions to their members depending on how long they worked for a company and how much they were paid.

Scheme funding levels have improved dramatically in recent years because higher government bond yields have increased expected returns on assets, therefore reducing the current accounting value of future liabilities.

Currently, DB scheme surpluses can only be accessed where schemes passed a resolution by 2016 to retain the power, under a law passed in 2004 by the last Labour government. Some schemes had large deficits and did not pass such resolutions.

Under the current rules, a surplus is also 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 government.

“[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.

Experts said the estimates that only a small proportion of the amount in surplus would be released reflected the fact that many pension trustees and company finance directors would still opt to sell their pension assets and obligations to an insurer to remove risk from company balance sheets and for administrative ease.

“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.

A government spokesperson said its proposals would “unlock funds to boost the economy, remove barriers to growth and ensure working people and businesses are able to benefit from the opportunity these assets bring”.