Accessing pension scheme surplus: what's in the Consultation Paper?
On 23 February 2024, the Government launched a consultation on proposals to help well-funded DB schemes invest in assets that support economic growth rather than de-risking. The consultation closes on 19 April so there is still time for interested parties to send in their views.
In September 2023, we explained why there are still several hurdles impeding the Government’s quest to access to surplus pension scheme funds: Pension scheme surpluses: The Mansion House Reforms (irwinmitchell.com). Six months on, Penny Cogher and Harriet Fletcher delve into the details of the consultation paper.
Overarching aim of the Consultation
Paragraph 7 of the Consultation paper sets out the purpose / overarching aim: namely introducing “reforms to the private sector DB pensions system that jointly benefit scheme members, sponsoring employers and the wider economy.” Options for Defined Benefit schemes - GOV.UK (www.gov.uk)
Core propositions:
There are three core propositions, which aim to strike a balance between safeguarding members’ interests, maintaining trustee accountability, and promoting effective use of surplus funds.
Surplus Extraction:
Surplus should only be removed when it is safe from a member benefit perspective.
Trustee Responsibility:
Trustees will continue to be responsible for managing scheme funding levels, overseeing the financial health of the scheme, and deciding how to use any surplus funds.
Non-Conditional Surplus Removal:
Extracting surplus will not be linked to an obligation to use the funds for specific purposes.
The proposals:
Statutory Override – where scheme rules prohibit access to surplus.
Following the call for evidence last year (11 July - 5 September 2023), the Department for Work and Pensions (DWP) is now aware of and addressing the fact that many scheme rules currently prohibit trustees from making surplus payments. The DWP has suggested two options: either a Statutory Override (introducing a statutory power that allows schemes to amend their rules) or a statutory power that directly empowers trustees to make surplus payments.
Taxation Changes:
The Government has approved legislation to decrease the tax charge on authorised surplus repayments from 35% to 25%, starting on 6 April 2024. This applies whether surplus is extracted while the scheme is ongoing or in winding up and applies regardless as to how the employer is proposing to use the surplus, once it has been extracted.
The Government is also exploring other tax adjustments to facilitate surplus return, such as allowing one-off surplus payments to members.
Scheme funding level – safeguarding member benefits
Currently, a scheme must be fully funded on a buyout basis before distributing surplus to an employer. The Government is considering relaxing this requirement to a less stringent but still prudent funding level. There are various options, based on different criteria, such as funding level and covenant strength.
Trustee guidance
The government intends to introduce additional guidance for trustees “to enhance transparency and informed decision-making in surplus management.”
There are three possible methods:
Adding an extra module to the existing ‘Funding Defined Benefits’ code of practice.
Introducing a separate code specifically addressing surplus extraction.
Providing guidance through TPR (The Pensions Regulator).
Super-levy
The Consultation paper proposes allowing schemes to pay a 'super levy' to secure 100% PPF protection for members. The PPF has estimated that this additional levy would be at least 0.6% of buy-out liabilities each year.
The underlying reasoning is that enhancing security provides trustees with greater confidence, thereby facilitating their agreement to release surplus funds. It may also make it easier to decide to run a scheme on where buy-out or transfer to a consolidator are also suitable “endpoint” options for the particular scheme.
