The government's plans to lift restrictions on how defined benefit (DB) surplus funds can be invested could go much further than most in the industry initially thought, analysis of the plans by LCP has suggested.

Chancellor, Rachel Reeves, recently confirmed the government's intention to bring forward legislation to give well-funded occupational DB pension schemes more flexibility in how they use their surplus funds.

Analysis of the latest DB funding estimates from TPR, which were used by government to inform the policy, showed that the total surplus that could be extracted from DB surplus funds on a buyout basis would be around £100bn.

However, LCP noted that the government's announcement did not talk about £100bn potentially being released, but a higher figure of around £160bn, which suggests that the government's estimates used TPR's low dependeny estimate of the aggregate DB surplus.

This is the level at which a scheme can invest in a ‘boring’ way, with very low chance of needing to call on the sponsor for help.

According to LCP, this much lower threshold would bring over 1,000 more schemes into scope, and make much more surplus available for the 2,000 plus schemes who would have been in surplus on the tougher measure in any case.

"The government’s focus on the £160bn figure is noteworthy as it suggests a view that surpluses should be available for distribution before a DB scheme reaches full funding on a buyout measure," LCP investment partner, David Wrigley, explained.

"This has the potential to really increase the appeal of running-on pension schemes with the potential for sooner, and larger, access to surpluses.

"The policy intent is welcome, with the prospect of real economic growth wins for the UK, all while protecting the gilt market.

"However, “the devil will be in the detail”, in particular the detail of how members will be protected and the extent that pension scheme trustees are legally constrained in their use of any new flexibilities.”

Indeed, despite broad support for the plans to relax rules surrounding DB surplus funds, industry experts have been quick to stress the need for the government to ensure that the right guardrails are in place.

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