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Trustees of UK pension schemes would be prevented from taking “overly risky” decisions after government plans to ease employers’ access to billions of pounds in pension fund surpluses, ministers said.
The government is consulting on proposals to enable employers to use surplus funds built up in defined benefit plans. These schemes currently serve around 10mn members.
The funding situation for defined benefit schemes has improved dramatically over the past 18 months, largely due to an increase in interest rates. This has driven down the costs, or liabilities, of these pensions.
The aggregate surplus of the UK’s 5,100 pension schemes was about £428bn at the end of December, according to analysis by the UK’s Pension Protection Fund.
Giving evidence to a parliamentary committee on Wednesday, Paul Maynard, pensions minister, was pressed by MPs on why allowing a surplus to be accessed by a sponsoring employer would help improve security for members, who were relying on the pensions for a secure income for life.
Maynard said pensions were “in a good place at the moment” with over half of (them) fully funded. “That is a very promising situation,” he said.
If surpluses could be used to ensure the solvency of the sponsoring employer “then that’s a good thing”, he said.
Nigel Mills, Conservative MP and committee member, asked the minister whether there was not a “danger to thinking everything was fine” with funding positions, and that “extracting lots of money today” could lead in two years to schemes being in a mess “they didn’t need to be in”.
Maynard said the government was focused on ensuring the mechanisms and protections for members around surplus extraction did not lead to “overly risky” decisions being taken by trustees, adding that he did not want schemes to take “inappropriate risks”.
Also appearing before the committee, Bim Afolami, economic secretary to the Treasury, added: “We need to make sure we have a very strong regulatory framework” for surplus extraction.
“When one is extracting a surplus we can’t just do [this] with the view that it will be fine forever and everything is completely hunky dory,” Afolami said.
He added: “One has to be cautious about how one treats surplus.”
Cameron McCulloch, a partner with law firm Pinsent Masons, said that if handled correctly, the government’s plans to allow surpluses to be returned to employers should be welcomed.
“These surpluses often arise due to contributions from the scheme employers which were more than needed to cover the liabilities due under the scheme,” said McCulloch.
“It feels right that employers should be able to get the funding surplus back in those circumstances, provided of course that members’ benefits remain adequately protected.”
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