Pension professionals from across the industry have welcomed the Department for Work and Pensions’ (DWP) defined benefit (DB) options consultation, but emphasised the importance of protecting members’ benefits.

The DWP launched its consultation on plans to make DB pension surplus extraction easier and its proposals for a public sector consolidator operated by the Pension Protection Fund (PPF) last week (23 February).

It is seeking views on how the money held in DB schemes can be best unlocked in the interest of savers and for sustainable investment in the wider economy.

LCP partner, Steve Webb, said it was welcome that the government was moving forward with ideas about the better use of DB schemes’ £1.4trn of assets.

“The suggestion of a ‘statutory override’ to make sure that all DB schemes in robust financial health could explore options around surplus extraction is a very positive one,” he continued.

“But with regard to surplus extraction, we do not believe many trustees would be reassured if the only safeguard for members before money could be taken out was that the scheme was currently well funded.

“Our proposal for full PPF cover, backed by a new PPF super-levy, would give trustees comfort that member benefits were fully protected regardless of what happened to the sponsoring employer in future, and could free up many billions of pounds of DB pension scheme assets to be invested more productively.”

Broadstone head of market engagement, Simon Kew, said that, given the improvements in funding levels, it made sense to enable greater scheme flexibility for surpluses.

“However, any extraction of surplus from a scheme will have a knock-on impact for member security – we are pleased to see the DWP acknowledge this but protecting member benefits must be the utmost priority as these reforms progress,” he added.

“The outlined plans for establishing a public sector consolidator by 2026 could open up opportunities for some schemes – particularly at the smaller end of the market – albeit we are expecting new entrants in the market this year to provide further supply for unprecedented de-risking demand.”

Professional and lay trustees will want to ensure that any extraction of surplus does not materially undermine the ability of individual schemes to meet the pension benefits promised by those schemes, stated Association of Professional Pension Trustees chair, Harus Rai.

“Our response may consider other options and I expect we may be supportive of the paper’s suggestion that ultimately further guidance will be provided to trustees via possibly adding a separate extraction code within the next iteration of the ‘Funding Defined Benefits’ Code,” Rai noted.

Meanwhile, Association of Consulting Actuaries chair, Steven Taylor, said that the right questions were being asked about surplus extraction, including around overrides to scheme rules where there are barriers to efficient outcomes.

“However, under any approach, we will want to see that there is the flexibility available to sponsors and trustees to make decisions that best suit their scheme specific situations and protect savers,” he continued.

“A key consideration must be that members’ benefits remain suitably protected whilst clarifying for all schemes the pathways that are available to allow for surplus extraction where this is appropriate.”

On the public sector consolidator proposals, Taylor argued there was a “key need” to ensure that the outcome does not risk undermining already well-functioning commercial market solutions that might offer better outcomes for scheme members and sponsors.

“The proposal in offering opportunities to a wide range of schemes appears far broader than initially expected and will require particularly close examination,” he said.

“For example there is a need to ensure measures do not introduce, to members’ detriment, a ‘get out clause’ to avoid implementing the appropriate long term strategies and journey plans that are now expected in well run schemes that are well able to achieve buyout over a reasonable timeframe.

“Proposals that result in simplifying benefits, whilst well intentioned, would also necessarily create winners and losers among scheme members and these trade-offs will need to be scrutinised.”

The DWP proposed that the public sector consolidator would be operated by the PPF, and PPF interim chief executive, Katherine Easter, stated the pensions lifeboat welcomed the consultation and was looking forward to working collaboratively with DWP and industry to establish the best design for a public sector consolidator that delivers the government’s objectives.

“The proposed consolidator would maintain the security of members’ benefits, give more choice to schemes and, dependent on scale, invest materially more in assets which support the wider UK economy and UK gilt market,” she stated.

“Given the £1.4trn scale of the DB sector, we believe the public consolidator can work alongside existing commercial providers, supporting a healthy market by providing an attractive option for schemes unable to access existing solutions on reasonable terms.

“We plan to engage with stakeholders both on the detailed design of the public consolidator and further viable approaches which use the PPF’s skills and capabilities; we stand ready to support the government achieve its objectives in any way we can.”

---