Options for DB schemes consultation: technical summary

The Department for Work and Pensions (DWP) has issued a second consultation on “Options for Defined Benefit (DB) Schemes”, following its July 2023 call for evidence (with the same title). Below, Tyron Potts gives a brief technical summary of the information we have so far.

Intended to support schemes investing in “UK productive finance”, the consultation is seeking views on the Government’s commitments, as announced in the 2023 Autumn Statement, to:

• make it easier for surplus funds to be shared with employers and scheme members; and 
• introduce a public sector consolidator, run by the Pension Protection Fund (PPF), aimed at smaller and less-well funded schemes.

Surplus extraction

As noted above, the Government is seeking to remove barriers – both practical and behavioural – to schemes investing for surplus in productive assets, by making it easier for surpluses to be shared with employers and scheme members. 

The consultation sets out the DWP’s “core propositions” in this regard:

• Surplus should only be extracted where it is “safe to do so” from a member benefit perspective.
• Restrictions will not be imposed on how surplus funds are used once extracted.
• Trustees would retain responsibility for managing a scheme’s funding position.

The consultation then goes on to seek views on the following changes that the DWP is proposing: 

• Applying a “statutory override” to enable surplus extraction, even where scheme rules do not currently allow this.
• Making it easier to make one-off surplus payments to members, by simplifying the tax process associated with this. 
• Setting “eligibility requirements” so that surpluses can only be accessed when a scheme is sufficiently well-funded. 

The consultation also considers whether a further “alternative safeguard” is necessary whereby employers could opt to pay “super levy” in exchange for the PPF offering a 100% level of compensation in the event of insolvency. Analysis from the PPF suggests that any super levy would need to be significant, at around 0.6% of a scheme’s buy-out liabilities each year (or higher if take-up was low). 

Public sector consolidator

The Government intends to establish a public sector consolidator administered by the PPF “by 2026”.  The intention behind this is to offer a practical alternative endgame solution for schemes which are unattractive to commercial consolidators such as insurers and superfunds (e.g. because they are too small, or not sufficiently well funded).

The DWP proposes that the consolidator will:

• be legally separate and ringfenced from the PPF’s existing funds, with entry purely on a voluntary basis;
• sever the link between employer and scheme (except where the scheme is underfunded at entry, in which case the sponsor will enter into a repayment agreement with the consolidator);
• invest part of its funds in “high-growth UK assets”, while maintaining an investment strategy that supports a prudent funding basis (as required of commercial consolidators); and
• potentially be subject to limits on overall size, and/or the annual amounts consolidated.

Broad eligibility for entry into the consolidator will be based on being able to demonstrate an inability to secure insurance buyout or join a commercial consolidator. However, the DWP is not minded to establish “hard limits” on eligibility with reference to scheme size or funding level.

In addition, the consultation proposes that:

• members will receive simplified, standardised benefits of “actuarial equivalent” value to those in the transferring scheme;
• the consolidator will be required to meet the same funding standards as commercial consolidators and entry price will be set in line with the target funding basis; and 
• the consolidator will be underwritten by either the Government (at a limited level) or the PPF’s existing established reserves in the form of a loan or commercial investment. 

The Government adds that it will “be consulting in the coming months on levy changes, and PPF compensation levels”.

Survey for DB schemes

As part of the consultation, which closes on 19 April, the DWP has asked DB schemes to participate in a short survey so it can gauge interest in the new consolidator, and likely take-up of surplus extraction relaxations.

The survey can be found towards the end of consultation - responses will be kept confidential and should be sent to: pensions.consultations@dwp.gov.uk.

Actions and next steps

We will be responding to the consultation, which closes on 19 April, and sharing our thoughts and insights on these important issues over the next couple of months. If you have any questions about this update, please contact your usual Barnett Waddingham client team.