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The UK government must prioritize reforming the UK's £1.2 trillion defined benefit pension system to unlock billions of pounds for investment, according to asset managers.
In November, the government announced plans to create a series of “super funds” across defined contribution (DC) and local government pension schemes to drive more investment in UK infrastructure and fast-growing businesses.
But it has not yet drawn up plans for defined benefit pension schemes for companies, despite a consultation by the previous government earlier this year which explored options to allow companies to access scheme surpluses, which could encourage them to invest more in risky assets.
“We think it's important that database schemes are seen as a priority – they have the potential to get money on the ground more quickly than other areas,” said Jos Vermeulen, head of solutions design at Insight Investments, which manages £665bn of assets. In the United Kingdom.
“There is scope to issue up to £100bn over the next 12 to 24 months… It is a once-in-a-generational opportunity to change the UK’s fortunes… If this opportunity is lost it could be gone forever,” he added.
Owen McCrossan, head of investments at abrdn group pension plans, said DB pension plans are “certainly a pool of capital that can help bridge the gap in productive funding”.
He added that allocating 5 percent to productive assets such as real estate and infrastructure “could raise about 50 billion pounds.”
This is the same amount the government hopes to pay into productive assets by 2030 under its plans to consolidate defined contribution workplace schemes with at least £25bn of assets.
The calls for the government to reform the rules around DB schemes come as it has delayed a pension adequacy review. The review was expected to set out plans to increase auto-enrolment pension saving rates, which the government hoped would lead to increased investment in the UK.
Vermeulen said it was important that the DB pension reforms were incorporated into the pension bill due in the middle of next year.
In an interview with the Financial Times last month, Pensions Minister Emma Reynolds said she had prioritized reform of workplace defined contribution schemes because that is “where the growth is”.
She noted that the majority of corporate defined benefit pension schemes were closed to new members and “naturally had a less long timeframe” with schemes moving into less risky assets as they scaled back or sold their pension liabilities to an insurer.
However, industry insiders say a radical improvement in the funding position of defined benefit pension plans in recent years means many are now in a position to take on more risk, if the rules enable companies and scheme members to take advantage.
To encourage 'employment' schemes and investment in productive British assets, Vermeulen proposed that the Pension Protection Fund should cover 100% of outstanding pensions in the event that the scheme was unable to meet its obligations. It currently pays between 70 and 90 percent.
The annual PPF tax is likely to rise as a result, but the government could waive the fee if the fund invests a certain amount in UK infrastructure or large companies.
“The government can say that it is moving forward, to stimulate investment plans in productive assets, if you invest 5 percent you will not pay any tax,” Vermeulen said.
Companies have been rushing to offload their pension liabilities to insurers in recent years, with a record £60bn of transactions last year, according to the pension fund. But this would slow if schemes could secure full protection from the Public Partnership Fund and if companies could benefit from surpluses.
In its response to the first phase of the pensions review, the Investment Association, which represents the UK fund management industry, encouraged the government to “allow the safe extraction of funding surpluses” from DB schemes, even though it is officially outside the scope of the review.
“Subject to placing certain guardrails around surplus extraction so that the security of benefits is not weakened, the ability to extract surpluses could provide an incentive to build surpluses by taking on more investment risk, consistent with the government’s broader objectives,” the agency said.
The Department for Work and Pensions said it was reviewing responses from previous government consultations on defined benefit scheme options, and that a decision on redundancy flexibility “will be made in the coming months”.
