The Department for Work and Pensions (DWP) has launched a call for evidence around how defined benefit (DB) pension schemes could increase the amount invested in productive asset classes, also confirming plans to introduce a permanent regime for DB superfunds.

The call for evidence, one of a number of measures announced in the Chancellor’s Mansion House speech, aims to help the government build up an evidence base as to the potential role DB schemes could play.

The DWP explained that it wants to do this while maintaining appropriate security of the benefits promised, not undermining the fiduciary duties of trustees and maintaining the stability of the gilt market.

Given this, the call for evidence is also seeking views on the prospect of more investment that provides equity capital and finance for businesses in the UK, including start-ups, infrastructure and private equity, as well as longer-term investments, typically in illiquid assets.

The consultation highlighted three specific areas of focus: DB asset allocation and incentives around investment strategies; current rules and barriers around surplus; and exploring the potential for consolidation option.

However, the government stressed that the direction of future policy is not yet decided, confirming that the responses to the call for evidence will inform the understanding of these issues and help inform the development of future policies in these areas.

The government also stressed that any future policy will be based "on evidence and fact", and guided by the Chancellor's 'three golden rules'.

Commenting in the foreword of the report, Pensions Minister, Laura Trott, stated: "DB schemes are great for members as they provide a secure income in retirement, but to do so they hold assets worth around £1.7trn.

"Several suggestions have been made as to how this money could be used more flexibly to benefit pension scheme members and the wider economy. We want to offer sponsoring employers and scheme trustees more choices going forward.

"This could include more consolidation options or more choices in how they invest DB assets and help them to generate greater surpluses.

"However, the government is acutely aware that changes to how this level of assets are invested can have considerable effects on the economy, both positive and negative, so we will need to go cautiously and understand the impact of any suggestions on the UK economy as a whole.

"As well as ensuring pensions are protected, we must prioritise having a strong and diversified gilt market and our decisions must strengthen the UK’s competitive position as a leading financial centre."

In addition to the call for evidence, the DWP confirmed that it will look to bring forward legislation on the introduction of pension superfunds, “as soon as parliamentary time allows”.

It is intended the primary legislation will provide for a new compulsory framework applicable to superfunds and other relevant models of consolidation, while secondary legislation will set out further details.

The DWP suggested that this approach will enable greater flexibility to respond to the changing market and enable more detailed consultation with industry.

While the government's response acknowledged that the overall funding position of DB schemes has "substantially improved" since the consultation on superfunds was launched in 2018, it acknowledged that the position remains "volatile", arguing that "the need for superfunds still exists".

"The buyout market is also not fundamentally interested in schemes that cannot afford their products and also has a natural ceiling to the value of schemes that can effect buy out in any calendar year," it stated.

"Superfunds provide a real opportunity to take significant risk to members out of the system and increase their likelihood of receiving full benefits."

Commenting in the Ministerial foreword, Trott also suggested that for sponsors for whom insurance buyout is out of reach, superfunds have the potential to improve the likelihood of members getting their benefits in full, whilst providing employers with a new, affordable way to manage their legacy pension liabilities.

"Superfunds are also ideally placed with the benefits of scale, significant new capital and a well-diversified portfolio to contribute to greater investment in assets that support the UK as a whole," she continued.

"They align with wider government initiatives designed to stimulate economic growth and will provide access to new sources of capital investment for UK firms, major infrastructure projects, other illiquid type investments, and fresh finance for sustainable technology, areas which up to now have suffered with under investment.

"Work will now begin to finesse the detail required to enable us to develop and progress the permanent legislative regime.

"Setting up this system will ensure that superfunds operate on a secure footing and support scheme members so they can confident that their position is being enhanced by this form of consolidation.

"I am pleased that at least one superfund, Clara Pensions, has met The Pensions Regulator (TPR) key expectations but I want to see this market develop further, and soon. I hope that reiterating the government’s support for superfunds, alongside TPR’s interim review, and committing to having a permanent regulated regime, as soon as parliamentary time allows, will help to maintain momentum and investor confidence and cement the legacy of this important innovation."

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