The Government has published a call for evidence seeking views on changes which could be made to the regime governing defined benefit pension schemes in order to achieve greater investment in "productive finance", for example infrastructure and private equity. The call for evidence asks about the impact of possible changes to allow scheme surplus to be withdrawn from ongoing schemes. It also asks for views on the possibility of a "public consolidator" vehicle for schemes, and the possibility of the Pension Protection Fund taking on this role.
Call for evidence on options for defined benefit schemes
In July the DWP published "Options for Defined Benefit schemes: a call for evidence". This was published as part of a wider Government agenda to increase investment in "productive finance". This is the Government's term for investment that provides equity capital and finance for businesses in the UK, including start-ups, infrastructure and private equity, as well as longer term investments, typically in illiquid assets. The call for evidence says that the direction of future policy is not yet decided and that future policy development will be guided by three key principles: ensuring fairness for defined benefit scheme members, prioritising a strong and well diversified gilt market, and strengthening the UK's competitive position as a leading financial centre able to fund its public services.
General questions regarding investment in productive finance
The call for evidence asks whether defined benefit schemes are underinvested in productive assets compared to international comparators and what changes might incentivise trustees and sponsors of DB schemes to consider investing in productive assets while maintaining appropriate security for the benefits promised.
Questions regarding pension scheme surpluses
The call for evidence notes that there is currently little incentive for DB schemes to invest with the aim of producing a surplus. It asks:
- how many DB schemes' rules permit a return of surplus other than at wind up;
- what conditions should have to be satisfied in order for extraction of surplus from a scheme to be permitted;
- whether enabling extraction of surplus before scheme wind-up would encourage more risk to be taken in DB investment strategies and enable greater investment in productive finance assets;
- whether greater PPF guarantees would result in greater investment in productive finance;
- what tax changes might be needed to make paying surplus to employers attractive "whilst ensuring returned surpluses are taxed appropriately";
- where a sponsoring employer also contributes to a DC scheme, whether it would be appropriate for additional surplus generated by the DB scheme to be used to provide additional contributions in excess of the statutory minimum to the DC scheme; and
- whether options to allow easier access to scheme surpluses could lead to misuse of scheme funds.
Questions regarding consolidators
The call for evidence says that the Government is exploring the pros and cons of a public sector consolidator for pension schemes. This would be designed to enable long-term investment timeframes which would support investment in UK productive finance. The questions it asks in relation to this issue include:
- what forms of consolidation the Government should consider and what their impact would be on schemes' asset allocation;
- the potential benefits and risks of establishing a public consolidator and whether this might adversely affect the existing bulk annuity market; and
- questions regarding the possibility of the Pension Protection Fund taking on the role of a public consolidator, including how this might work and the impact this might have on other consolidation models including the existing bulk annuity market.
The call for evidence closes on 5 September 2023.
Some of the ideas raised in the call for evidence would involve radical changes to the current regulatory framework for pension schemes. However, Government thinking in this area is clearly still at a very early stage, so it remains to be seen whether any of the ideas raised in the call for evidence will actually be implemented.
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