Industry experts have broadly welcomed the government's plans to give defined benefit (DB) pension schemes more flexibility to access surpluses, although proposals to establish a public sector consolidator (PSC) have received a more divided reception.

The government is currently consulting on plans designed to help make DB surplus extraction easier, alongside plans to establish a public sector consolidator operated by the Pension Protection Fund (PPF) by 2026.

The plans to allow greater access to DB surpluses have received a broadly positive reception, with TPT Retirement Solutions chief executive, David Lane, suggesting that these reforms could create a much greater incentive for schemes to consider run-on, serving as an alternative solution to an insurer buyout.

“This could benefit trustees, sponsors, and members by providing more endgame options,” he said. “Running-on to access scheme surpluses could lead to improved member benefits and increased business investment.”

This was echoed by Brightwell CEO, Morten Nilsson, who said that, subject to the right checks and balances, affording pension schemes greater flexibility around surplus would be a positive step, as making it easier for surplus to be returned to sponsors may be helpful in giving them greater comfort on avoiding risks of overfunding.

Hymans Robertson head of pension policy innovation, Calum Cooper, also highlighted the reforms as a “once in a generation opportunity” for DB schemes to make decisions that will have a material impact on both stakeholders and members.

However, Cooper stressed that it is “vitally important” that the possibility of putting accrued benefits at risk and sharing surplus should have minimum conditions.

In addition to this, he said it is important that schemes are encouraged and enabled to manage surpluses with long-term sustainability in mind.

"There must be mutual consent between trustees and sponsors to enable a carefully managed surplus to create value responsibly and sustainably for both parties," he stated.

Indeed, Nilsson agreed that "clear guidance is essential", as scheme rules are often silent on the question of ‘who owns the surplus’ or sponsors and trustees have differing views.

"Scheme funding is only ever a snapshot in time and even with a low dependency funding strategy which is resistant to market stress, trustees may be nervous about releasing surplus, especially when that surplus is more recent," he added.

“Our recommendation is that the statutory override should not allow trustees to amend scheme rules around surplus at their sole discretion but, should be done in agreement with the sponsor.”

But whilst the government’s plans to relax DB surplus rules have been broadly welcomed, subject to member protections, the proposals for a PSC have received a much more divided response from the industry.

The Association of Consulting Actuaries (ACA), for instance, raised “significant concerns” about the proposed approach to eligibility for the PSC, particularly given the PPF’s published initial views on the scale with which it envisages the PSC operating, warning that this could cause “significant disruption to the commercial settlement market”.

ACA pension schemes committee chair, Peter Williams, said: “For most DB schemes we believe that existing end-game options are effective and that insurance markets function well.

"Combined with the new funding regime for schemes that want to run-on, and commercial superfund solutions now emerging, most trustees already have the tools they need to complete their journey plans over coming years.

“We believe government should focus on getting the superfund regime in place, including providing clarity on extraction of profit and when this can happen.”

In particular, the ACA said that whilst it is "very supportive" of the ability to simplify benefits on entry, it should be made available to all consolidators, and insurers on buyout – with appropriate safeguards - rather than being a commercial differentiator for the PSC only.

TPT Retirement Solutions agreed, arguing that, in order to ensure a level playing field and avoid negatively impacting the market, any ability to standardise benefits should be extended to private sector consolidators.

"TPT recommends that benefit standardisation should be available across the industry though this would clearly need to be regulated within a clear legal framework," it stated.

"Allowing this would also enable smaller schemes to access consolidation opportunities."

In addition to this, the Pensions Management Institute (PMI) argued that it is not clear that a public consolidator will have any meaningful impact on overall investment in UK productive finance, despite being a key objective of this policy.

The PMI also said that it does not consider it appropriate that existing PPF funds be used to underwrite a public sector consolidator and that it cannot see a strong argument for why UK taxpayers should provide this underwriting, on top of funding the existing state pensions system.

Instead, if the government believes there is merit in creating a public consolidator, the PMI argued that a fixed limit on asset size under which it will be available is the most appropriate eligibility criteria to avoid competing with the commercial market, suggesting that schemes with £1m in assets or less might be a reasonable entry level.

PMI director of policy and external affairs, Tim Middleton, said: “It is very important to avoid increasing the burden for taxpayers by creating a public consolidator unless the case for doing so is clearly proven.

"We don’t think the government’s proposals will achieve its objective of increasing investment in UK productive finance. If the government does create a public consolidator, then the ability to standardise benefits needs to be extended to all schemes to ensure a level playing field with commercial consolidators.”

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