The government has been urged to provide a greater safety net for defined benefit (DB) pension schemes through the Pension Protection Fund (PPF), in order to encourage investment and spur economic growth.

In its latest briefing, The Economic Miracle of Great Britain, the Social Market Foundation (SMF) suggested that, to maximise the amounts being returned to employers, DB pension trustees will have to feel secure that such actions will not threaten member benefits.

While there are safeguards in place, including oversight from The Pensions Regulator and sponsoring employers, the SMF warned that trustees may still feel the need to retain as much surplus as possible to offset the impact of a worst-case scenario.

The SMF acknowledged that the PPF already acts as a safety net for members’ pensions in such a scenario, although it clarified that this is only partial protection, as the PPF pays 90 per cent of the original scheme’s promised pension.

Given this, the SMF called on the government to adjust PPF protection to cover all pension scheme members’ benefits, suggesting that moving to offer 100 per cent protection would reassure trustees that even if surplus assets are released, members’ benefits would continue to be protected.

Broader changes may also be needed to ensure that DB pension surpluses could potentially be returned to members, in the form of discretionary increases or bonuses, or used to fund increased DC contributions, the SMF suggested.

The report noted that, where this has been attempted so far, the employer has used surplus as the employer pension contribution – with no additional benefit going to members.

Given this, the SMF advocated for surpluses to be released slowly, allowing pension fund trustees and government to monitor implications, and amend approaches based on evidence.

In addition to this, it urged the government to confirm that the release of pension surpluses will be dependent on a minimum of full funding on a low-dependency basis, where trustees allow.

The SMF said that this is a "prudent" threshold while ensuring the surplus available is enough to incentivise employers to release surplus, clarifying however, that this should be a minimum threshold, with trustees able to retain more assets in a fund if they wish to.

But the SMF warned that releasing surpluses is only one step to greater domestic investment, suggesting that other measures will need to be taken to increase the supply of investable assets, such as infrastructure projects.

In particular, the report suggested that the government should introduce schemes focused on increasing growth, like GB Energy and the National Wealth Fund, in which DB schemes might also invest.

SMF senior researcher, Gideon Salutin, said: "The late Frank Field described pensions as ‘The Economic Miracle of Great Britain’ – but for too long, DB pensions are being held back by a system that was built to minimise risk.

"Going forward, they could support a more dynamic and productive economy while protecting the security for their members,

“Our report provides a roadmap to government to ensure the release of pension surpluses is as smooth as possible – as well as making suggestions to ensure Britain makes the most of this initiative and benefits from the support of domestic pension funds for years to come.”

Adding to this, Insight Investment head of solution design, Jos Vermeulen, said: “DB pension schemes are in excellent health, and their surplus assets could unlock wide-ranging benefits for sponsors, members and the wider economy.

"The government’s decision to enable and encourage these schemes to release surpluses is very positive, but the details are crucial to unlock their full potential, as the report highlights.

“Pension scheme sponsors and trustees need to be confident that releasing surplus is the right decision.

"Allowing surplus release when a scheme is fully funded on a prudent, low dependency basis will offer sponsors and members a meaningful financial boost while retaining pension security; and increasing the protection offered by the Pension Protection Fund will reassure trustees that members’ pensions will be paid in full, even if surplus is released.

"With these in place, we expect the government’s policy to achieve an optimal outcome for pension scheme members, employers, and the UK.”

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