DWP Consultation outcome ‘Options for Defined Benefit schemes': Hymans Robertson Comments

Commenting on the DWP Consultation outcome ‘Options for Defined Benefit schemes’, Sachin Patel, Head of Corporate DB, Hymans Robertson says:

"We warmly welcome this watershed moment that will positively impact the future for millions of peoples’ pensions and the productive impact of their £1trn+ store of DB pensions capital. The DWP’s response today to the ‘Options for Defined Benefit schemes’ consultation, and the government’s balanced proposals provides DB schemes with more flexibility to distribute surplus funds, while keeping member security at the centre, putting the DB universe in a very progressive landscape. 
 
“Our consultation response emphasised the importance of establishing clear, prudent thresholds and robust governance to ensure that surplus distributions do not compromise member security. We’re pleased to see the government's commitment to implementing appropriate safeguards in this regard.

“Allowing surplus distribution, without prescribing how it must be shared, offers a once in a generation opportunity for both employers and members to benefit from the improving strong funding positions. Crucially, decisions must remain fair and transparent and should be reached collaboratively between trustees and employers. We see the government’s direction of travel, through amending the minimum threshold for surplus sharing with employers, as helpful and this will provide schemes with the flexibility to tailor their surplus distribution approach to reflect their own situation.

“While the government’s response today was relatively light on tax detail, we believe this area warrants further focus. Allowing one-off lump sum payments to DB members to be treated as authorised payments, free from punitive tax charges, would significantly enhance the appeal of surplus distribution, without adding material future liabilities to pension schemes. There’s also a real opportunity to incentivise schemes to run-on by offering tax incentives on surplus funds reinvested into pensions, UK productive or growth assets. These reforms could help align member benefits, employer sustainability and national economic priorities.

“We look forward to seeing how plans for a government backed consolidator evolve. We’re supportive of the introduction of a public-sector consolidator in principle if it fills a gap in the commercial endgame market and improves member outcomes where full benefits would otherwise be at risk.

“However, we’re keen to ensure that competition in the commercial consolidation and insurance markets are not impacted by this. As highlighted in our recent risk transfer report, and referenced in the government’s response, small schemes are already benefiting from more streamlined access to insurers, with increased capacity and innovation across the market, and we expect this to improve.”

Commenting on the DWP Consultation outcome ‘Options for Defined Benefit schemes’, Richard Wellard, Head of Alternative Risk Transfer Solutions, Hymans Robertson says:

“The government’s intention to use a low dependency funding level, as outlined in today’s DWP consultation outcome, as the threshold for sharing surplus with employers provides the perfect opportunity for tailoring and flexibility. However, it does have some material knock-on implications. The Pensions Regulator (TPR) currently oversees the low dependency basis set by trustees for defining when contributions need to be paid into the scheme. Opining on the level at which scheme funds can be paid out, and back to the employer, will be an entirely new direction for TPR. Time will tell how comfortable and straightforward this will be. 

“Another consideration following today’s update is that the surplus sharing rules for superfunds will be different to surplus sharing rules for all other pension schemes. The detail is yet to be announced, but if pensions schemes will be able to share surplus at a lower funding level than superfunds, there will naturally be a lot of scrutiny around the precise definition of a superfund.”