Industry experts have argued that defined benefit (DB) pension schemes are set to play a key role in the push for UK growth, as DB funding improvements have continued even amid the general election.

PwC's latest Buyout Index revealed that the collective surplus of the UK's corporate DB schemes reached a new high of £285bn in July.

In addition to this, PwC’s Low Reliance Index, which tracks the position of the UK’s DB schemes based on a low-risk income-generating investment strategy, also showed a record surplus of £410bn.

LCP's Pensions Explorer showed a similar trend, revealing that the combined IAS19 pensions surplus for the UK pension schemes of FTSE100 companies stands at around £60bn, broadly unchanged from the position at 30th June.

The index showed that despite the change in UK government, the aggregate IAS19 pension funding levels moved by less than 0.1 per cent over the day before and after the election, with markets likely already pricing in a Labour majority.

Amid this sustained surplus position for pension schemes, the potential to unlock pension scheme assets to drive investment in the UK economy has continued to be explored, as PwC pointed out that this was one of the key aims of the initial phase of the pensions review announced by the government earlier this month.

“The position of the UK's 5,000 DB schemes has never looked stronger and we are pleased to see the new government has put pension schemes at the heart of its mission to 'boost growth and make every part of Britain better off'," PwC head of pensions funding and transformation, John Dunn, said.

“DB pension schemes can play a part in this growth, particularly if the initiatives around surplus sharing as an incentive for schemes to run-on are pushed forward.

"There is appetite from a number of schemes to seriously consider this model and, as we've explored previously, it could unlock £340bn for sponsors and members."

This was echoed by LCP analyst, Harry Fitchet, who said: “The rhetoric from the new Labour government highlights the potential to use pension schemes as a vehicle to drive growth in the UK. Given the size, and potential rewards, pension schemes running-on have a big part to play.”

However, LCP noted that whilst the new government has outlined a focus on growth and investment in the UK economy, the new DB funding code released this week is potentially at odds with this.

Given this, it argued that, if the government wants to align pension schemes to help them reach their goal, they need to make it easier for schemes to run on and permit easier use of surplus.

LCP argued that using the surplus to provide other benefits, such as defined contribution (DC) top ups or improvements to DB member benefits, as well as for companies to receive some or all of the funds back, could be a win for members, for companies, and for the wider economy.

Following new TPR guidance issued last week, LCP also noted that extraction of surplus is now possible for superfunds, arguing that it would be "natural" for new legislation to extend this power to pension schemes.

If not, LCP warned that the industry could see well-funded schemes defaulting to insurance rather, without considering run-on or other options that can help deliver UK growth and improved stakeholder outcomes.

However, PwC pointed out that the government chosen to focus part of the first phase of its pensions review on the pensions of town hall employees, suggesting that allocating more of the LGPS' "substantial" assets to UK infrastructure projects would "certainly provide significant funding for critical projects".

“With assets of around £360bn, the LGPS has been described as among the largest pension schemes in the world," PwC head of public sector pensions, Steve Blackmore, said.

“That said, we think the real opportunity emerges over the next decade and beyond," he added.

"LGPS pensions continue to grow, as current and future town hall workers build them up, and if income and outgoings broadly balance this will mean the LGPS will double its asset base every ten years - potentially becoming an even more potent UK growth accelerator.”

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