Government ministers have hit back at concerns that changes to defined benefit (DB) surplus extraction rules could lead to future pension issues, confirming that a consultation on the issue is "forthcoming soon".

Speaking to the Work and Pensions Committee (WPC), Pensions Minister, Paul Maynard, said that while pensions have been on a “rollercoaster” in recent decades, “we’re now in a much better position in terms of funding”.

In particular, Maynard pointed to analysis from The Pensions Regulator (TPR), which suggested that around 70-75 per cent of schemes now have the headroom to engage in more productive finance.

“Right now we can look at how productive finance can play a more meaningful role in helping to achieve scheme ambitions," he continued. "It's not about dictating to them what they can do, but it's about expanding their policy toolbox."

Adding to this, Economic Secretary to the Treasury, Bim Afolami, argued that there is no contradiction between productive finance being an increasing part of the policy agenda when it comes to DB schemes, at the same time as increasing returns to savers.

WPC chair, Stephen Timms, queried whether the government was looking for additional productive finance investment from DB schemes, noting that the Chancellor's previous estimates of the additional productive finance investment hoped to be secured included defined contribution and Local Government Pension Schemes, but not the broader DB landscape.

In his response, Maynard argued that there is no reason why DB schemes should be excluded from benefiting from productive finance, acknowledging however, that the tools that you might deploy will be different from those that you would apply in terms of DC schemes.

"We need to give trustees the confidence to be able to make decisions they might not have thought of doing before, but having that confidence because it's within the tram lines of what the regulator has advised," he continued.

"So it's about equipping the trustees to feel more confident to ensure that they are always acting in members best interests, but that might be by triggering surplus extraction, for example, so they can return benefits to members."

Plans to consult on whether changes to rules around DB pension scheme surpluses could incentivise investment in UK growth were previously announced as part of the Chancellor's Autumn Statement reforms.

However, WPC member and Conservative MP, Nigel Mills, queried whether there is a danger to think that everything is fine given the current “actuarial sweet spot”, risking another potential pensions crisis in the future if appropriate protections are put in place.

Responding to this, Maynard clarified that while he is keen for DB schemes to look at surplus extraction as a way to enhance member benefits, the government does not want trustees to take "inappropriate risks" with member benefits.

"So one of the things we want to focus on is making sure that we're the mechanisms of surplus extraction and protections in the regulations around surplus extraction don't lead to overly risky," he confirmed.

However, Mills again pushed back on the assertion that DB surplus extraction would be to the benefit of members, arguing that it would primarily be to the benefit of the employer.

In response though, Maynard argued that, if it ensures the solvency of firm, a surplus extraction can be a "good thing", ensuring that the firm is in a better position to meet its liability.

Adding to this, Afolami confirmed that a consultation to consider the right way to make changes to DB surplus extraction rules is "forthcoming, soon".

"It's important because there are some schemes where it is clearly set out in the documents how surplus will be allocated, but there are others where it is not the case," he explained, agreeing that "we need to make sure that we have a a very strong regulatory framework".

The committee also asked whether the consultation would look at options to allow members to split any surplus extraction between members and the employer, or to boost DC pension benefits.

However, Afolami said that he didn’t want to “prejudge” the consultation, suggesting that there is a divide as to whether using DB surplus extraction to boost DC surplus can be a good thing.

Instead, he argued that the focus is on ensuring that any DB surplus' extracted are doing the most productive thing for the economy and the most productive thing for the members, in a way that is "not unduly risky".

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