Government Eases Access to Defined Benefit Pension Surpluses

‍ Updated May 29, 2025

The government is ⁤moving‍ to ease⁤ companies’ access to surplus savings within⁢ defined benefit pension⁢ schemes, a ⁤decision praised by ⁤experts. Ministers hope this will unlock billions of⁣ pounds for investment in‍ corporate Britain,boosting economic ⁤growth.

The government announced Thursday it is considering lowering the threshold⁢ at which trustees can share assets exceeding pension obligations. this shift involves moving from the price an insurer would pay to take over the fund to⁢ a less stringent measure.

The Department for Work and Pensions (DWP) plans to consult on reducing the threshold to the “low dependency funding”⁤ basis.⁣ industry regulators estimate this could unlock a surplus of £160 billion.Currently, a buyout basis⁢ would⁤ yield a surplus of⁣ £68 billion, according to Pension Protection Fund (PPF) calculations.

Steve Hodder, consultant at LCP, believes the⁤ government is taking “the bolder approach,” which he deems appropriate given the existing caution within the pensions system. iain McLellan, director at Isio, described the proposals as “a significant‍ shift in [defined benefit] scheme regulation.” He added that the industry is eager to “embrace these changes and the⁢ opportunity to support growth and greater innovation” in defined benefit pension management.

The UK’s £1.2 trillion corporate defined benefit pension system, largely closed to ‍new members, has seen improved funding levels recently. This is attributed to a rapid rise in government borrowing costs, which boosted expected returns. ⁢The government stated it is “minded to⁢ legislate to replace the existing buyout threshold for surplus extraction with a new threshold set at full funding on the low dependency funding basis” following⁢ a consultation launched last year.

The DWP also plans to introduce a statutory power enabling trustees to modify scheme rules for surplus sharing, where current rules do not permit it. The government clarified that any decision to extract surplus remains with the trustees. It also ruled⁤ out 100% cover from the PPF for scheme sponsors unable to meet obligations, preventing undue risk-taking in pension investment.

The Pensions and Lifetime ⁢Savings Association stated that surplus⁢ release could⁢ improve member benefits, boost defined ⁢contribution pension contributions, and support new types of investment, with appropriate saver protections.

What’s next

Further details will be outlined⁢ in the pensions bill,expected next ⁢month. This bill will also legislate for measures from the⁤ pensions investment review, including consolidating defined contribution workplace schemes into “megafunds” of⁣ at least ⁢£25 billion by 2030.Provisions will be made for successful smaller schemes with a “transition pathway” to reach scale, provided they have a “credible plan” to grow to £25 billion by 2035. A “new entrant pathway” will‍ also encourage⁤ market innovation and the creation of multi-employer collective defined contribution pension schemes.