Industry experts have argued that “the rules of the game must change”, amid concerns that the defined benefit (DB) pensions industry is currently working against the government’s productive finance agenda due to the current regulatory framework.

Speaking at the PLSA Annual Conference 2023, WTW head of GB clients, Pieter Steyn, noted that “an enormous number” of DB pension schemes are now very well-funded, warning that “we therefore have a wall of money that is currently de-risking and getting rid of productive finance".

“So this absolute wall of DB capital is currently de-risking, becoming more liquid and funnelling through into the insurance regime," he continued.

"The issue though, is that inside the insurance regime we have a capacity issue, so it's going to take some time for this wall of money to get into the insurance regime and be reinvested into productive finance.

"At this point in time, the DB pensions industry is working against the government's productive finance agenda. Not deliberately, but because the DB industry has a different incentive."

WTW UK head of retirement, Rash Bhabra, agreed, arguing that "the way in which the regulation and legislation currently works means there is little incentive for trustees other than to take risk off the table".

Bhabra explained that, from an employer perspective, DB schemes are typically seen as a one-way route, with no opportunity to benefit from a surplus, meaning there is no incentive to carry on taking risk.

"And from a trustee perspective, the whole mantra from the regulator over the past 15 years has been to take risk off the table when we can," he continued. "So given that framework, it's not surprising that we are seeing the challenges we are."

However, Bhabra argued that there is an opportunity to use some DB assets and surpluses for the benefit of both DB and DC members to provide higher retirement incomes.

"But for that to happen, the rules of the game have to change," he stated. "The current asymmetry that exists in that risk/reward trade-off needs to be changed, so that people feel that there is a reason to behave differently."

Key changes outlined by Bhabra included potential changes to the current 35 per cent tax rate on refunds of surpluses to an employer to match the main rate of corporation tax, currently 25 per cent, as well as changes to provide a straightforward legal route by which DB surpluses can finance contributions to a DC scheme used by the same employer.

These changes were also previously outlined in WTW’s paper, Six changes to seize the DB pension surplus opportunity, which said that while the government has been looking to get more pension savings invested in UK productive assets, this will only be possible if schemes adopt different objectives.

"It is a genuinely exciting time to be working in the pension space," Steyn added.

"DB surpluses could potentially be used to uplift DB members benefits. DB surpluses could potentially be used to fund DC schemes, and some DB surpluses could eventually go back to some sponsors.

"Pensions are at a crossroads, an important crossroads, and we need to take the right path so that we have the right policy framework to generate good member outcomes."

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