Industry experts have welcomed the government's plans to change defined benefit (DB) surplus rules to provide more flexibility, whilst also stressing the need for the government to ensure that the right guardrails are in place.

The Prime Minister, Keir Starmer, and Chancellor, Rachel Reeves, are set announce plans to lift restrictions on how well-funded occupational DB pension schemes will be able to invest their surplus funds later today (28 January).

Investment Association director of policy, strategy and innovation, Jonathan Lipkin, welcomed the news, suggesting that unlocking surplus capital from DB pension schemes has the potential to both boost UK growth by opening up investment opportunities for companies and their stakeholders, as well as the possibility of higher pensions for scheme members.

"With around £1.1trn in assets, defined benefit schemes already make a significant contribution to the funding of the UK economy and public services," he continued

"With the right guardrails in place, the government’s proposals could help channel more funding into the economy, by enabling schemes to invest more widely and take on greater risk, while allowing for members to receive an uplift to pension benefits."

This was echoed by Pensions and Lifetime Saving Association director of policy and advocacy, Zoe Alexander, who said: "The PLSA backs surplus release, with the right protections in place to ensure member benefits are secure.

"Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers’ defined contribution workplace schemes.

"Lowering the legislative threshold for allowing returns of surplus could potentially encourage trustees, in conjunction with their employers, to adopt a more ambitious mindset and take on slightly riskier investment strategies for their DB assets, including greater investment in UK assets."

The People's Pension chief executive officer, Patrick Heath-Lay, added: "It is positive news to see the government is looking at the pension industry as a whole. This will help unlock more of the £2.9trn that is held in UK pension savings, to benefit savers and the economy alike.

"We look forward to other pension schemes following our plans and outlining how they will invest in private markets."

However, LCP partner, Steve Webb, pointed out that there is no indication of any plans to give trustees greater ‘comfort’ about the security of member benefits once surplus funds are extracted, warning that this could limit the take-up of the new freedoms.

"The government’s commitment to freeing up access to DB surpluses is a very welcome development and offers the potential to benefit employers, pension scheme members and the wider economy," Webb stated.

"In some cases, it will be possible as things stand for an employer to give a trustee enough comfort about the security of member benefits for the trustee to allow some surplus to be extracted.

"But ideally the government would go further and offer a way of guaranteeing member benefits, such as enhanced cover by the Pension Protection Fund (PPF), which would allow all surplus schemes to participate in this new option. We need something bigger and bolder to maximise the potential of these reforms”.

Broadstone head of policy, David Brooks, raised similar concerns, warning that trustees' fiduciary duty could be the 'Achilles Heel' of the government's plans.

“The rhetoric for the government is clear – there are billions of pounds in pension schemes which should and could be used," he stated.

"However, similar to the arguments in the DC space over “megafunds”, the ultimate fiduciary duty for the trustees is to secure the members’ benefits that have been accrued over many years which may well be the Achilles Heel of surplus utilisation.”

Barnett Waddingham partner and head of DB endgame strategy, Ian Mills, also stressed the need to get the detail behind the proposals "right".

"Clearly, taking money out of DB schemes could worsen the security of the benefits promised from them," he stated.

"The rules regarding when and how money can be accessed will be critical. So we’ll be pouring over the details as soon as they’re published."

Wider market impacts could also be seen, as Mills suggested that the "main loser is likely to be the insurance industry", as scheme sponsors may be less keen to buyout if they can access surpluses,

Whilst Mills clarified that most schemes will still buyout, just later than they otherwise would, he acknowledged that there could be a slow-down in insurance buyout deals, especially at the larger end of the market, where running-on is likely to be most cost-effective.

"Smaller schemes are still likely to buyout as soon as they can, as their higher proportional running costs make running-on uneconomical," he added.

"We expect to see innovation in consolidation vehicles, aimed at enabling smaller schemes to access economies of scale and reap the benefits of running-on."

Brooks agreed, stating that, for smaller schemes, the costs of running the scheme indefinitely may outweigh the gain to be made from investment return."

He also queried how long run on will look for schemes wanting to invest and for the return to be extracted while meeting the policy aim of investment in UK productivity.

Broader concerns have also been raised, as Mills cautioned the government against going "too far", and potentially encouraging DB schemes to dump gilts onto the market, forcing up the government’s borrowing cost going forwards.

"It won’t have escaped Rachel Reeves’ attention that the DB pension market remains a key buyer of gilts, whereas buy-out insurers tend to hold much lower allocations," he explained.

"Encouraging schemes to run-on for a while could be supportive of the gilt market. But reforms that go too far could encourage DB schemes to dump these gilts onto the market, forcing up the government’s borrowing cost going forwards.

"This could, however, be offset to some degree by an acceleration of tax revenue – surplus withdrawals attract a 25 per cent immediate tax charge.

The government will set out the details of the surplus policy in its response to the Options for DB pensions consultation, due this spring.

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