LCP says that the government’s £160bn does not tally with the £100bn surplus reported. (Image: Getty)
Rachel Reeves announced pensions changes last month that for the economy.
The reforms, which build on those announced by her predecessor during his speech in the city of London in July 2023, involve loosening restrictions on defined benefit pensions, which include so-called final salary pensions.
The plans mean that schemes with a surplus—money ‘leftover’ after accounting for all savers and pensioners—can use that cash to invest in more risky but potentially higher-growth assets, including growing UK companies.
However, one pension expert has noticed a problem with the headline figure.
David Wrigley, partner at LCP and an investment expert, said the Government’s plans for extracting ‘surplus’ DB funds go much further than most have realised.
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According to The Pension Regulator, there are only £100 billion in surplus funds in UK pension schemes.
But Mr Wrigley said the Government had referred to £160 billion.
Mr Wrigley said the only way to £160 billion is to count as a surplus anything above what is known as the ‘low dependency’ level.
The low dependency level is where a scheme can invest in more boring assets, such as gilts, and has a very low chance of needing to call on the sponsor (the company running the pension scheme) for financial help.
Using this much lower threshold, LCP estimates that this brings over 1,000 more schemes into scope, some of which will be higher dependency, which means they are more at risk of not being able to pay out their members’ pensions.
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Mr Wrigley said: “The Government’s focus on the £160bn figure is noteworthy as it suggests a view that surpluses should be available for distribution before a DB scheme reaches full funding on a buyout measure.”
LCP said more protection may be needed, and the Pension Protection Fund may need to be beefed up to prevent employers from using schemes to invest in more risky assets.
Wrigley said the idea of freeing up surpluses was positive but needed to be thought through.
“This has the potential to really increase the appeal of running-on pension schemes with the potential for sooner, and larger, access to surpluses. The policy intent is welcome, with the prospect of real economic growth wins for the UK, all while protecting the gilt market. However, “the devil will be in the detail”, in particular the detail of how members will be protected and the extent that pension scheme trustees are legally constrained in their use of any new flexibilities.”
The has been approached for comment.