The government has been urged to consider ways to protect pension funds should recent funding improvements reverse, after industry analysis suggested that proposed Mansion House reforms could boost defined benefit (DB) scheme sponsors by up to £50bn.

Analysis from Barnett Waddingham found that, if the Mansion House proposals are agreed, around £50bn of surplus funds would currently be available to be returned to sponsors of FTSE 350 DB schemes, equivalent to around 10 per cent of FTSE 350 DB scheme assets.

Commenting in response to this analysis, RSM UK acknowledged that many schemes have suddenly found themselves in an ongoing funding surplus, and sponsors would like to recover any trapped surpluses.

Given this, it agreed that a policy re-think makes sense to help companies and their pension scheme trustees work out together the best way to allocate capital, given their respective responsibilities.

"The government sees this as an opportunity for pension schemes and companies to invest in what it sees as ‘productive’ for the wider good," RSM UK pensions restructuring advisory partner, Donald Fleming, stated.

"Removing barriers to such investment - for example by removing the tax penalties on extracting pension surpluses – seems a sensible way to level the playing field.

However, Fleming argued that the government looks to be going further, effectively reversing the current de-risking approach, by encouraging pension trustees and sponsors to take on new risks from investment - potentially in venture capital and equity.

“If this goes ahead, the government must consider how the system will protect pension funds if surpluses reverse, or the investments don’t work out as planned,” he stressed.

This was echoed by RSM head of pensions, Ian Bell, who likened the approach to the Gordon Brown “tax raid on pensions” in 1997, justified on the basis that DB schemes were well funded and many were in surplus.

“This move triggered over two decades of funding demise, with funding pressure placed at the door of employers,” he emphasised.

“Surely trustees will be wary and not allow events to repeat themselves if there is any risk to funding and scheme members’ long-term security?”

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