The previous government consulted on proposals for DB schemes that focused on easing the legislative barriers to extracting surplus for both sponsoring employers and members, as well as considering an expansion to the role of the Pension Protection Fund (PPF) to operate as a public consolidation vehicle.
This formed part of the package of measures announced at the 2023 Mansion House speech by the then Chancellor, with the intention of ensuring a strong DB pensions sector that also contributes to the wider economy.
The government has now published its response to the consultation which indicates various proposals will be taken forward, dropped, or subject to further investigation.
Extracting scheme surplus
Introduction of a statutory power
Section 251 of the Pensions Act 2004 required a trustee resolution to have been passed before 6 April 2016 to enable a scheme to continue to have the power to make surplus payments to employers. No payments can currently be made without a section 251 resolution in place. Furthermore, not all schemes contain a power in their rules to share any surplus with the sponsoring employer.
Legislation will give trustees the power to modify their scheme’s rules by resolution to provide for surplus to be shared with the employers. In addition, the current requirement for a section 251 resolution will be repealed. Precisely how the extracted surplus is used will not be mandated.
Reduction of the funding threshold
The threshold at which surplus can be shared with employers is to be amended from the current buyout level to full funding at the low dependency funding basis. Regulations, which will be subject to consultation, will set out further details.
Safeguards for members
The legislative provisions for paying surplus to employers is covered in Section 37 of the Pensions Act 1995. The government is to amend the statutory requirement for surplus extraction to be “in the interests” of members, to clarify that trustees must act in accordance with their overarching fiduciary duties to scheme beneficiaries.
The consultation response makes it clear that trustees should “continue to make surplus extraction decisions in the context of other, wider considerations, including the strength of the employer covenant and the potential for members to benefit from surplus extraction”.
Once the legislation has been finalised, the government will work with The Pensions Regulator to produce guidance on DB surplus extraction.
100% PPF underpins
The government had considered introducing the option of a 100% PPF underpin where trustees could choose to pay a higher “super levy” in exchange for full member compensation in the event of the sponsoring employer failing to meet their funding obligations. The consultation had sought to understand whether this would have a material impact on the willingness of trustees and employers to extract surplus.
This was largely rejected by respondents to the consultation, who felt that the given the high cost to individual schemes, and the moral hazard risk, it would not be effective in driving surplus extraction. The government has, therefore, decided not to introduce a 100% PPF underpin.
Pensions tax considerations
Since 6 April 2024, the tax charge on an authorised surplus payment to an employer is 25%. The government believes the pensions tax framework for surplus payments is broadly balanced and fair, but it will keep the tax regime in this area under review.
Creating a public consolidator
Concern has been raised about the lack of opportunities that some DB schemes, typically smaller schemes, can have in accessing the commercial superfund market, and so the government had proposed establishing a public consolidator vehicle. This would be run by the PPF, and had been intended to be established by 2026. The consolidator role would be entirely separate from the PPF’s traditional function as a compensation fund for members of underfunded DB schemes with insolvent sponsors.
Respondents to the consultation were divided on this proposal. The government recognises that “a small, focused government consolidator, administered by the PPF, could offer an alternative solution for schemes and has the potential to help to address a fragmented pensions landscape”. However, it is keen to develop a public consolidator that complements, rather than competes with, existing options.
As a result, the role that a public consolidator could play will continue to be explored, and there will be no provision for this in the forthcoming Pension Schemes Bill.
Comment
With a change in government since the consultation was undertaken, this response provides welcome clarity on the current government’s plans. The government is right to consider changes to the surplus rules – not only because it is relevant to a growing number of DB schemes, but because the existing legislation needs to be considered in light of current policy objectives.
There is no immediate action for trustees or sponsoring employers; the precise detail on the changes will be contained in the forthcoming Pension Schemes Bill and subsequent regulations, along with (hopefully) practical assistance in Regulator guidance.
The public consolidator proposal remains a work in progress, and with it not being legislated for in the Pension Schemes Bill, the planned effective date of 2026 will inevitably be deferred.
