Viewpoint: How a DB ‘surplus code’ could support economic growth in the UK

For decades, legacy defined benefit (DB) pension schemes have been a weight around the necks of UK employers, stifling investment and growth. Hundreds of billions of pounds have been spent over this time on building up the asset pots within these schemes, with regulation focussed on making sure schemes have more than enough money so members are fully protected if investment returns do not materialise.

All of this has come at a cost to UK sponsors and, with the benefit of hindsight, has gone too far given the huge surpluses these DB schemes now collectively have. There is now a massive opportunity to rebalance and refund some of these surpluses, so that they can instead be spent on new investment and new jobs, giving a shot in the arm to the economy.

Without change, these surpluses will gradually erode as many of these pension schemes will choose to move into lower returning investments and choose to transfer all the assets and liabilities to insurance companies. For some individual schemes, this will be the right thing to do, but looked at collectively this is a massive wasted opportunity.

Instead, if schemes were able to more easily pass on surpluses to their sponsoring employers, or use surpluses to provide benefits for current employees through other pension arrangements, this would provide both an immediate and ongoing support to the economy.

Supporting the generation and appropriate release of surpluses would also give a second round of benefits as it would incentivise more schemes to generate returns and invest in more growth assets, many of which would be based within the UK.

In my view, it’s worth changing the focus away from how these schemes invest and whether the asset mix should have a further, say, 5% in “productive finance”. Instead, the focus should be on the more immediate benefits arising from simply allowing the existing and future surpluses to be released. In turn this surplus can then be directly invested in research and development, hiring new employees, increasing wages and increasing pension savings for future generations.

The numbers are huge. We’re talking about upwards of £100bn (€119bn) that could be released from DB pension schemes over the coming years. That figure is also before the second round impacts of growth investments made within the schemes themselves, which would arise through providing the aforementioned incentives to generate returns and build bigger surpluses.

With this in mind, it is timely that leaders of the UK’s main economic regulators were due to gather in Downing Street this week to explain how they will contribute to the government’s growth agenda.

Before Christmas, regulators received a letter asking them to set out how they could contribute to the government’s drive to boost economic growth, and they are expected to make in-person presentations to the chancellor shortly.

This provides an important opportunity to share ideas from industry on safely releasing surpluses as a way to immediately support growth. It is also welcome that it is the regulators who are having these discussions, as they can also share ideas about how to safely and appropriately release surpluses and what new rules should be set in this regard.

At LCP we’ve been advocating for a bigger role for the Pension Protection Fund (PPF), the pension lifeboat scheme, to provide greater levels of protection alongside the regulator to provide clear guidance on the circumstances in which surpluses can be released.

Within the DB pensions industry, we’ve recently had a new funding code, but that was created to largely deal with scheme deficits and issues of the past. Once a scheme has met these new requirements, which most schemes have, what is really needed is a “surplus code”.

We need an acceptance that surpluses can be a force for good and legal/regulatory support for surpluses to be continually (and sustainably) grown, and most importantly, released to support the economy.

David Wrigley is a partner at pension consultancy LCP