UK defined benefit surplus reforms ‘positive’ for schemes and employers

Stephen Scholefield, pensions expert at Pinsent Masons, was commenting following changes unveiled by prime minister Keir Starmer and chancellor Rachel Reeves. The reforms are designed to provide more flexibility in managing occupational defined benefit (DB) pension schemes, thereby fuelling investment in the wider economy.

The announcement will see a lifting of restrictions on how “well-funded occupational defined benefit pension funds that are performing well” can invest their surplus funds. This move is expected to unlock substantial amounts of money that has been “trapped” within these pension schemes, allowing it to flow into the broader economy.

According to the government, approximately 75% of schemes are currently in surplus, worth £160 billion. However, current restrictions mean that businesses often struggle to invest this additional cash. Under the new rules, DB schemes will be able to amend their rules in order to permit surplus extraction. This will allow for more options to be explored in order to reach the best deal for scheme members, permitted where there is a trustee-employer agreement.  

By allowing pension funds to invest surplus money in the wider economy, the government aims to stimulate investment in infrastructure, businesses, and other growth-oriented projects. By unlocking surplus funds and investing them in high-growth areas, the government also aims to boost the value of pension pots, ensuring a more secure and prosperous retirement for millions of working people.

The increase in investment opportunities may also allow trustees and employers to use surplus money to increase the productivity of their business. For instance, boosting wages, driving growth, or unlocking more money for pension scheme members. In some circumstances, sponsoring employers may invest surplus funds into their core business, whether this be for equipment or supplies or to provide additional benefits to members of the pension scheme, subject to trustee agreement.

Scholefield said: “Crucial to the success of this increased flexibility will be the guard rails that are put in place to protect the security of members' benefits and the role played by trustees who will need to be satisfied that a deal benefits their members. The prospect of running schemes for the long term, growing and sharing surpluses in a risk-controlled way, could be a step change in how pensions are provided. “

Further details of the surplus policy will be set out in the government’s response to the “Options for Define Benefits” consultation, due this spring.

“This would also be an opportune moment for the government to clarify the rules over use of DB surplus to fund DC contributions going forwards,” said Scholefield.