Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.

The recent Department for Work and Pensions (DWP) consultation ‘Options for Defined Benefit Schemes’ sought views on several new initiatives for UK defined benefit (DB) pension schemes. 

We were pleased to submit a full response to the consultation, which closed on 19th April. This article provides a quick summary of our views across the three consultation areas.

1. Treatment of scheme surplus

We believe legislating to enable surplus extraction will increase the options available for DB pension schemes. This additional option could influence the way schemes invest, and potentially increase allocations to high-growth UK assets.

One of the government’s key objectives is to facilitate investment in productive finance. To support this aim, the threshold for surplus extraction needs to allow schemes to invest the assets in a fashion that will deliver the required cashflows with a high degree of certainty while freeing up some capital for productive finance investing.  

We underline the need for involvement from trustees and sponsoring employers in surplus extraction discussions

In our response to this initiative, we underline the need for involvement from trustees and sponsoring employers in surplus extraction discussions. This includes recognition of the role of sponsors in funding and risk-taking.

In principle, we see strong benefits to setting a basis (a funding threshold for surplus extraction) that is transparent and investible, to reduce volatility caused by idiosyncratic risks in the comparator.

New guidance from The Pensions Regulator (TPR) will be essential to protect members’ interests. We believe trustees will need a clear set of guidelines to feel empowered to facilitate a run-on or surplus extraction proposal from their scheme’s corporate sponsor.

While regulatory barriers can be changed, a mindset centred around protecting pensions at all costs remains a significant barrier to surplus sharing.

2. Alternative safeguard: 100% Pension Protection Fund (PPF) underpin

Implementing a 100% underpin could address concerns regarding surplus extraction by providing further safeguards for member benefits.

A 100% underpin could also encourage higher allocations to growth assets, such as UK productive finance.

For the underpin to be effective, it will need to provide adequate security (for example, through a government guarantee) and be cost-effective.  

There should be safeguards against a sponsor or pension scheme opting out of the higher levy after surplus has been extracted  

We note that the indicated cost of 0.6% a year of buyout liabilities may be considered prohibitively expensive for many schemes. This would cause the enhanced levy regime to be ineffective in its aims. Furthermore, there should be safeguards against a sponsor or pension scheme opting out of the higher levy after surplus has been extracted.

3. Model for a public sector consolidator

The PPF has a strong track record of delivering a valuable safety net for members of DB pension schemes. If a public sector consolidator were to be launched, the PPF would be an obvious candidate.  

The needs of small schemes can be met by commercial providers

However, we do not believe a compelling business case for a public sector consolidator has yet been made. In our view, the needs of small schemes can be met by commercial providers, and we would question the need for the involvement of a public sector entity. We also propose alternative approaches for assessing scheme attractiveness to commercial consolidators and suggest caution regarding benefit simplification and surplus treatment.

Final thoughts

We’re supportive of the government’s ambition to provide more options for DB schemes and we believe there is a significant opportunity to create additional value for members, sponsoring employers and the UK economy. We look forward to engaging with industry and government to help shape the future of DB schemes in the UK.

About us

abrdn is a leading global investment company with a long history of managing pension assets for DB schemes and the insurers that serve the DB market.

We manage assets for around 350 DB schemes in the UK including one multi-billion pound scheme for which we are also the corporate sponsor. We are committed to providing innovative solutions for pension clients.

In addition to core investment management services, these solutions include a fiduciary management service for DB pension scheme trustees and a DB consolidation vehicle (‘abrdn pensions master trust’) that enables improvements to the way small-to-medium-sized pension schemes are run.

We invest for 150 insurance clients worldwide, including several UK and overseas insurers and reinsurers that serve the UK DB market through the bulk purchase annuity (BPA) and BPA reinsurance markets.

Our response to the consultation reflects the views of abrdn at the time of writing and may be subject to change. abrdn is not a legal firm and thus the views expressed should not be considered as a legal opinion, nor should it be considered advice of any kind.