The Government has confirmed plans to release billions of pounds from private sector pensions in a bid to boost economic growth.
In a speech in Oxfordshire, the Chancellor Rachel Reeves said she will relax rules around defined benefit pension schemes, where retirement incomes are guaranteed by the employer.
The gold-plated plans, most of which are closed to new members, have risen as a result of high interest rates in recent years, meaning many have a large surplus of funds.
When unlocked, pension trustees and employers could then use this extra money to increase the productivity of their businesses – to boost wages and drive growth or unlock more money for pension scheme members.
The i Paper spoke to experts to find out how the changes would work and what the risks are.
Reeves announced plans to allow corporate pension surpluses that are worth more than £100bn to be released and reinvested.
The new plan will see the pension surpluses reinvested back into companies or used to provide better employee benefits, rather than kept in safer but lower-return assets such as Government bonds.
Downing Street said earlier this week about 75 per cent of corporate defined benefit (DB) pensions, also known as final salary schemes, have a surplus worth £160bn.
But up until now, restrictions have meant that businesses up and down the country have struggled to reinvest them.
In the widely anticipated speech, Reeves said: “We will be introducing new flexibilities for well-funded defined benefit pension schemes, generating even more investment into some of our fastest growing industries.”
Benjamin Craig, associate director of R&D Incentives at Ayming UK, said this is a “welcome step to unlocking investment”.
He said: “But crucially, the Chancellor must clarify exactly how the surplus will be used.
“Without a clear long-term strategy that demonstrates a commitment to bolstering business confidence, the reforms risk being a missed opportunity.
“It’s all well and good talking about investment – but what does this mean for businesses and SMEs who form the lifeblood of our economy?”
Why is the Government looking to open up pension schemes?
The move is intended to drive investment by firms while also encouraging them to take more risk in their pension investment strategies.
Starmer said it will open up billions in investment. Approximately 75 per cent of schemes are currently in surplus, worth £160bn, but restrictions have meant that businesses have so far struggled to invest them.
More than £1.1trn is held by pension funds in the UK and defined contribution pension schemes are set to manage £800bn worth of assets by the end of the decade.
Pension members should, hopefully, benefit as the surplus could be shared, boosting pots and reducing pensioner poverty.
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Nausicaa Delfas, chief executive of The Pensions Regulator, said: “Our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits.
“Where schemes are fully funded and there are protections in place for members, we support efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy.”
Businesses are also set to benefit by having more investment into staff, growth and sustaining their firms.
One of the key questions about the move is how safe the surplus money will be.
Experts said there would need to be guarantees from Britain’s pensions lifeboat, known as the Pension Protection Fund (PPF) – which is ultimately guaranteed by taxpayers.
Sir Steve Webb, former pension minister, said: “Ideally the Government would go further and offer a way of guaranteeing member benefits, such as enhanced cover by the PPF, which would allow all surplus schemes to participate in this new option.”
Tom Selby, pensions expert at AJ Bell, added: “It is crucial the chancellor’s increasingly desperate efforts to kickstart the economy don’t put member’s hard-earned pensions at risk.
“DB schemes’ funding positions have improved substantially in the past couple of years, in large part because of a dramatic rise in gilt yields – a rise that, ironically, was in part driven by Liz Truss’ disastrous mini-Budget.
“If employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme – particularly if gilt yields subsequently shifted in the wrong direction and scheme liabilities increased.
“This is why it is vital any extra flexibilities are tightly controlled and ensure the interests of pension scheme members remain protected.”
More details are expected to be revealed on this later today.
Do experts think this is a good idea?
Several experts voiced their approval for the plans.
Ian Mills, partner at Barnett Waddingham, said: “This could be a great thing for the UK economy. Returning surplus capital to sponsoring businesses enables them to invest, potentially creating a lot of jobs and/or enabling efficiency improvements.”
He added the extra funds release will probably be shared with members of the pension schemes, contributing to a reduction in pensioner poverty.
However, he acknowledged there are a lot of details to work through.
Sachin Patel, head of corporate DB endgame strategy at Hymans Roberson said: “We welcome the news that the Government’s focus is back on changes to increase the flexibility around DB surplus.
“As always, the details will be key. To ensure surplus sharing has a meaningful impact, it will be important for current legislative restrictions to be lifted whilst introducing smart tax initiatives. These could include incentives for investing in UK assets or tax-favourable mechanisms for sharing surpluses with other employer-based defined contribution pension schemes.”
He said that any changes should not cut across the duties of DB pension scheme trustees and must ensure that existing member benefits continue to be safeguarded and secure.
Other experts warned there could be concern over the new plans given the outrage that surrounded Robert Maxwell, a media tycoon, who stole millions of pounds from his employees’ pension funds.
Rachel Vahey, head of public policy at AJ Bell, said: “Maxwell and other historic pensions scandals still live long in the memory, and it’s imperative we don’t forget about the pension saver at the heart of this revolution. Trustees have an important role here.
“They need to be gatekeepers to the surplus, to make sure it is only handed to employers where the members’ financial future isn’t compromised. But they could find themselves caught in the crosshairs, facing pressure from employers on one side to release funds, whilst meeting their number one objective to protect pension scheme members on the other.”
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