Industry analysis has suggested that changes to defined benefit (DB) pension surplus rules could make up to £100bn available to UK companies, although concerns over the long-term risk could limit this.

As part of the Mansion House reforms the government previously launched a call for evidence around how DB pension schemes could increase the amount invested in productive asset classes, including start-ups, private equity, and illiquid assets.

In response to this, analysis from XPS Pensions, Premier Milton and Burges Salmon found that some changes to the regulatory system governing how companies can use DB pensions surpluses could generate £100bn for companies and pension scheme members by 2034.

The report suggested that these surplus funds could be used to improve pensions for DB members, build the pension pots of defined contribution (DC) savers or reinvest into UK businesses to provide a boost to the UK economy.

The analysis was based on a number of industry and regulatory changes, including making long-term run-on for DB schemes a genuinely viable alternative to full insurance buyout, where the circumstances are right to do so.

In addition to this, the report suggested providing sponsoring companies with a legal right to access these pension scheme surpluses, on the condition that the DB scheme is fully funded above insurance buyout levels.

It also recommended removing the 35 per cent tax on funds withdrawn from pension scheme surpluses as an incentive for companies to redeploy such surpluses.

XPS Pensions co-CEO, Paul Cuff, stated: “The DB pensions market is rightly focused on protecting the security of members’ benefits.

"But there’s an opportunity to use pension surpluses to address societal goals – like levelling the playing field between people in DB and DC pension schemes or encouraging investment in companies’ UK operations.

"The approach we have outlined can contribute to UK growth while protecting DB scheme members’ benefits.”

Adding to this, Premier Milton Group chairman, Robert Colthorpe, said, “UK firms must prosper if we want to grow the UK economy and create the wealth that our society needs and depends on.

"We must therefore ensure that we support UK long term risk capital formation and investment in UK businesses at all stages of scale and growth. We believe the proposals set out in this report enable UK DB schemes to do much more of this without compromising the security of members’ benefits.”

However, research from Aon suggested that liquidity and risk concerns could slow progress on the investment aims of the Mansion House reforms.

When asked what has previously stopped them from investing more in illiquid assets, 41 per cent cited liquidity, 27 per cent mentioned risk, and 11 per cent the availability of appropriate products. Issues around complexity and governance were mentioned by the remainder.

Aon associate partner, Shelley Fryer, stated: “This may be a reflection of the maturing of DB pension schemes and lower cash contributions from sponsors, meaning that liquidity of invested assets is more important and the ability to recover from downside shocks is reduced.

"It may also reflect a desire to hold more liquid assets in order to respond to market volatility or to transact with an insurer.

“Additionally, the effects of last year's gilts crisis have left some schemes already overweight in illiquid assets. They are currently more likely to be inclined to reduce their holdings than increase them.”

The Association of Professional Pension Trustees (APPT) also warned that care will be needed in the reform of any DB surplus rules, stressing that "a surplus only really materialises on scheme wind up when the scheme benefits have been bought out in full".

"Whilst in its broadest context we understand and support consideration being given to wider uses of surplus, we would highlight that, as it stands, use of any surplus is determined by individual scheme rules and would need to be with reference to the full range of circumstances, including - but not limited to - the scheme funding position, long-term objective and strength of the sponsor covenant," APPT chair, Harus Rai, stated.

However, Cardano argued that reforming corporate DB schemes would require retrospective action to reverse decades of measures to protect the security of member benefits, which could prove practically difficult.

Instead, Cardano argued that funded UK public and state pension schemes could help the government support its economic growth ambitions, reduce the long-term fiscal burden on the state and avoid the constraints that would necessarily apply to reforming corporate DB pensions in order to protect member benefits.

In its response, the group highlighted examples of successful investment in productive assets by Canadian, Nordic and Dutch pension funds as the most obvious route to unlocking funds to underpin UK economic growth.

In particular, the group called for the creation of a public or state pension fund with similar investment strategies as global peers including Canada Pension Plan, Sweden’s AP funds and the Netherlands’ ABP and PFZW.

Indeed, Cardano’s analysis suggests that a £500bn public or state pension fund in the UK could reduce the government’s fiscal burden by £15-25bn per annum.

However, Cardano acknowledged that there is scope for marginal improvements to corporate DB funding which could positively impact low risk/low return productive assets.

Included in this were measures to “de-stigmatise” investment in private debt by DB schemes, measures to encourage the bulk annuity market to invest further in private debt, and ways to use the Pension Protection Fund's (PPF) (unowned) surplus for the benefit of the UK economy.

Cardano Investment CEO, Kerrin Rosenberg, commented: “For a long time the UK’s DB pension regime has worked incredibly effectively to prioritise delivering members’ benefits, often at the expense of the sponsoring employer and the wider economy.

“Policymakers’ appetite to stimulate the economy and encourage investment in UK productive assets is laudable. However, with the majority of DB schemes closed and on an inexorable path to de-risking, there are more obvious solutions available that don’t involve ripping up the regulatory rulebook.

“By harnessing the vast potential of unfunded state and public service pensions, we can act now to support economic growth over the next decade and beyond, while also safeguarding state pension benefits for future generations.

“A public and state pension superfund could become a significant contributor to UK economic growth, while also freeing up funds from national insurance contributions to support state spending commitments in other socially important areas.”

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