The Government’s recent announcements on pensions and UK productive capital makes it obvious tome that they are turning their attentions to DB pension scheme surpluses. It appears that as a result of joined up Government, they will publish their ruminations on surpluses at the same time as they present the new Pensions Bill. So okay, they published the thrust of their intentions on the 29th May slightly ahead of my forecast but as this is a short article I will focus on surpluses and leave the stargazing on the other parts of the Bill to others.

As we all know, the current problem has been how do you spring a surplus out of a DB pension scheme within the terms of the current legislation and individual trust deeds and rules? After the pension scheme surpluses of the 1980s most employers took contribution holidays. This was followed by substantial pension scheme deficits 15 years later [and included the Maxwell pensions

scandal in the middle]. The current legislation was a determined effort to stop pension schemes becoming the mere playthings of Company leadership teams.

However, by 2025 most PLC’s believed that the current legislation is too tough and the bar for releasing DB fund surpluses is set far too high. In effect they are saying“ come on Gov gives us a hand”. Both the last Government and this one have heard that call and are about to pronounce on this subject. However, with the passage of time this current Government’s announcements will be different to what Whitehall had been working on for the previous Government [and the change will have nothing to do with Socialism]. 

I now expect that:

The Government’s response will be to set out clear intentions to make it easier for“ well-funded” DB schemes to release surpluses back to the business and scheme members where Trustees agree it is safe. This will be by way of a statutory override to Trust Deeds and rules. [details will be published with the upcoming Pensions Bill]

• Although the recent announcements state that tax rules will remain the same, these are issues for the Treasury to control so as this Government seems to want DB surpluses to be used to invest in UK start-up companies or ones that are being kept small because they have no real access to normal commercial capital .The taxation system will be used as a ‘carrot and stick’. Those companies willing to invest in the ways that the Government dictate will receive their surplus payment tax free. However those Companies that want to spend the new money how they like will be subject to a new DB surplus wealth tax at 40% on all monies extracted. The next Finance act is not until the Autumn but these issues could play a central role in this years UK Budget.
• Where Companies follow the Government in investing in UK business they will be allowed to use a portion of their new found surplus to help fund any DC scheme that their employees contribute to, irrespective of whether that DC scheme has any connection with the original DB scheme from whence the surplus was realised. It seems there will be no pressure on employers to add this money to the DC fund but it will be by form of substitution so that employer groups can save their own monies to wash through their profit and loss to add to shareholder funds;
• Employers will not have to re-invest 100% of any realised surplus but only have to play by the new rules to avoid the tax charge mentioned above. The balance of any surplus would be available for in-company plans or shareholder funds. Trustees will need to balance surplus utilisation requests with the fiduciary duty to protect member benefits.

So, a new surplus utilisation code is just around the corner but this on its own will not stem the tide. UK regulators have recently held meetings with government officials to discuss issues such as the regulatory perimeter, economic growth and streamlining regulations. These meetings reflect the governments focus on ensuring regulators support economic growth while minimizing ‘unnecessary burdens’ on businesses.

We all know that members have contributed significantly to surpluses over the years with higher contributions and lower accrual rates. Whilst it doesn’t affect their pension entitlement it does mean that they have overpaid and should share in the surplus. Hopefully this legislation will encourage schemes to apply inflationary protection to pre-97 accrued benefits first. This would compensate many that lost the winter fuel allowance and reduce the cost of paying means tested state benefits to others. It should also help to remove the worst effects of the inflationary shock of a few years ago. 

Finally it will be important to define exactly what a surplus is, so that pension schemes [and their members] do not plunge back to deficits in a few years’ time. Perhaps everyone should recognise that monies more than buy-out levels are the only real surpluses and if the UK pensions industry had not taken risk reduction to the nth degree in the last 15 years there would have been larger surpluses for everyone to benefit from - including scheme members.