Whilst industry experts have welcomed parts of the government's plan to "overhaul" the defined benefit (DB) pensions regime, concerns have been raised over the potential risks to members, as well as the broader insurance and superfund market.

The Department for Work and Pensions (DWP) is currently consulting on plans designed to help make DB surplus extraction easier, alongside plans for a public sector consolidator operated by the Pension Protection Fund (PPF).

The Society of Pension Professionals (SPP) welcomed the government’s objective of making it easier to return surpluses to employers, suggesting that the proposed measures “could create an economically attractive rationale for sponsors to run on pension schemes, whilst maintaining a reasonable level of security for members and potentially making discretionary increases in benefits more likely.”

However, the SPP also warned that these proposals are not without risk, as “any extraction of surplus would reduce the security of member benefits”, arguing that the government should ensure an appropriate balance is achieved.

SPP DB committee chair, Chris Ramsey, said: “Parts of the government’s proposals to overhaul the DB pensions regime certainly have merit, but as our consultation response makes clear, they are also riddled with uncertainty, risk and challenge.

“We very much hope that our response provides government with some food for thought when it decides its next steps for what remains a vital part of the pensions landscape.”

In particular, while the SPP agreed with the proposals for a 100 per cent underpin for those pension schemes which agree to pay a ‘super levy’ would give assurance to trustees seeking to run on their pension schemes and potentially return surplus to the employer, it argued that an annual super levy of 0.6 per cent of buyout liabilities, as illustrated, would be “prohibitively expensive” – especially as it would only be accessible to well-funded schemes with strong covenants.

The SPP also expressed concerns about the implementation of such an underpin, warning that without due care it “may encourage trustees and sponsors to take unnecessary risk”.

Furthermore, although the SPP acknowledged that a public sector consolidator has many potential benefits, it argued that the government hasn’t been clear on what it is trying to achieve.

It therefore cautioned the government against any measures that would “disrupt the well-functioning insurance market or stifle the development of the superfund market”, recommending that government ensures the terms of any public consolidator are consistent with commercial superfunds.

This sentiment was echoed by LCP, which argued that while the PPF could have a key role to play in the ‘endgame’ for DB pension schemes, any new regime would need to play to PPF’s strengths, ensuring that it met needs not currently well served by the market.

LCP partner, Jonathan Camfield, said that the PPF could have a market stabilising role to play in improving outcomes for members of smaller schemes.

Given this, he suggested the consolidator could focus on schemes with liability values that are under say £10m, whilst maintaining the ability to take on larger schemes subject to a ‘gateway test’ designed to mitigate the risk of unfair competition with superfunds or insurance buyout.

Commenting, LCP partner, Jonathan Camfield, said: “These are exciting times in the DB landscape, and the PPF could have a crucial part to play in making the most of current opportunities.

“For large well-funded schemes, the option of full 100 per cent PPF protection could give trustees comfort and encourage such schemes to run on and invest in a wider range of productive assets, generating surpluses to benefit members and sponsors.

"For the smallest schemes, a public sector consolidator could improve outcomes, but its place in the market will need to be carefully judged to reduce the risk of unfair competition with other options already available to schemes.

“The government must be bold in reforming the rules around DB surpluses, alongside improved member protection, to make sure that pensioners, UK business and the wider economy can make the most of the assets which have been built up over decades of careful stewardship of DB funds”.

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