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Change in defined benefit surplus rules could spur £100bn investment in the UK economy, report finds

Change in defined benefit surplus rules could spur £100bn investment in the UK economy, report finds

04 Sep 2023

A change in pensions law could make up to £100bn available to UK companies to improve outcomes for DB members, close the generational gap in retirement savings or invest in the UK economy, a report has found.

The analysis, carried out by pensions consultancy XPS Pensions Group, investment firm Premier Miton and independent UK law firm Burges Salmon, found that some changes to the regulatory system governing how companies can use defined benefit (DB) pensions surpluses could generate £100bn for companies and pension scheme members by 2034.

The report proposes that these surplus funds could be used to improve pensions for DB members, build the pension pots of defined contribution (DC) savers or reinvest into UK businesses to provide a boost to the UK economy.

The industry and regulatory changes proposed by the report, which should be made on the condition that surpluses are used by sponsors to facilitate these investments, include:

  • Making long-term run-on for DB schemes a genuinely viable alternative to full insurance buyout, where the circumstances are right to do so. 
  • Providing sponsoring companies with a legal right to access these pension scheme surpluses, on the condition that the DB scheme is fully funded above insurance buyout levels.
  • Removing the 35% tax on funds withdrawn from pension scheme surpluses as an incentive for companies to redeploy such surpluses.

The report comes in response to the Government’s consultation on its proposed Mansion House reforms. As part of the Chancellor’s Mansion House speech, the Government backed an agreement between large DC schemes to invest 5% of their assets in UK private equity by 2030.

The report’s authors believe a similar approach would be unsuitable for the defined benefit market, where many schemes are approaching maturity and risk appetites are generally much lower. The authors believe the approach they outline can satisfy the Government’s objective of making more capital available to invest in the UK economy, while protecting and improving the benefits due to those in DB schemes.

Paul Cuff, Co-CEO of XPS Pensions Group, said, “The defined benefit pensions market is rightly focused on protecting the security of members’ benefits. But there’s an opportunity to use pension surpluses to address societal goals – like levelling the playing field between people in DB and DC pension schemes or encouraging investment in companies’ UK operations. The approach we have outlined can contribute to UK growth while protecting DB scheme members’ benefits.”

Robert Colthorpe, Chairman of Premier Miton Group plc, said, “UK firms must prosper if we want to grow the UK economy and create the wealth that our society needs and depends on. We must therefore ensure that we support UK long term risk capital formation and investment in UK businesses at all stages of scale and growth. We believe the proposals set out in this report enable UK DB schemes to do much more of this without compromising the security of members’ benefits.”

Richard Knight, Head of Pensions at Burges Salmon, said, “We believe the ideas set out in this report are realistic, legally supported and actionable. They also have the key advantage of relative simplicity compared to some other ideas in the market.” 

To read the report, How DB pension schemes can support UK growth and protect members click here.


The analysis of DB pension schemes in this press release and in the report is based on XPS’s proprietary XPS DB:UK model. XPS DB:UK tracks the funding position of UK DB schemes on a long-term target basis and allows real-time monitoring of changes and analysis of the reasons behind any movement. XPS DB:UK monitors the combined deficit and funding level of schemes (i.e. all registrable schemes, including hybrids) on multiple bases including insurance costs and a low dependency rate using a discount rate of gilts + 0.5%. It combines XPS’s market leading Member Analytics and the award-winning journey planning tool, Radar, enabling real time monitoring of changes and analysis of the reasons behind any movement.

To model the surplus that could be generated by the universe of private sector DB schemes, XPS filtered the schemes that may be in scope in practice for a long-term run-on approach by removing the largest and smallest schemes. It allowed for a distribution of funding levels by extrapolating the ranges seen in XPS’s database of around 600 schemes onto the universe of DB schemes as a whole, and batching the schemes into 20 cohorts depending on when the schemes are projected to reach full funding on an insurance buyout basis over the next 20 years.

Assets have been projected forwards based on market conditions at 30 June 2023, with allowance for expected returns on each scheme’s assets of 1% pa above government bond yields. No allowance has been made for further deficit reduction contributions from employers for the purpose of this modelling, noting that if anything this will understate the amount of surplus that could be generated. Liabilities have been projected forwards based on market conditions at 30 June 2023, using XPS’s in-house insurance buyout pricing basis. Allowance has been made for projected cashflow payments and the impact of membership ageing on the projected cost of insurance.

Data sources include data from The Pensions Regulator, the Pension Protection Fund, the PPF 7800 Index and the XPS data pool of member lives.

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