What is being consulted on?
Surplus extraction
Noting the Pensions Regulator's recent estimates that 3.750 DB schemes out of approximately 5.000 schemes are in surplus and the fact that trustees may wish to share the surplus with members and sponsoring employers in recognition of their historic contributions, the Government wants to introduce measures to make surplus extraction easier. Having already published a call for evidence in November 2023 on this issue, the Government is now consulting on its proposals.
The Government's stated aims in the surplus part of the consultation are to:
- Support schemes to invest surpluses in productive asset allocations (as part of the Government's wider 'productive finance' agenda).
- Remove practical barriers to surplus extraction (e.g., scheme rule restrictions).
- Remove 'behavioural barriers' by bringing surplus extraction in line with trustee duties.
The Government is, however, clear that surplus should only be extracted where safe to do so from a member benefit perspective.
The specific proposed changes being consulted on are:
- To introduce a 'statutory override' so that trustees are not prohibited from extracting surplus as a result of restrictions in trust deeds and rules. This is in response to concerns put forward in the Call for Evidence, and would either be provided via a trustee power to amend their trust deed and rules or a specific power to make surplus payments.
- To potentially facilitate one-off surplus payments by amending tax legislation so that this would not constitute an 'unauthorised payment' to members.
- To ensure that member security is preserved following surplus payment, a number of eligibility criteria are being considered, including various proposed qualifying funding criteria and an additional minimum covenant requirement.
- As an alternative safeguard, the Government is consulting on the potential introduction of a system where payment of a PPF 'super levy' could be made in exchange for the PPF offering 100% PPF compensation to the pension scheme.
PPF public consolidator
The second part of the Government consultation set out further details of the proposal, first announced as part of the Mansion House programme last year, to establish a new public consolidator for smaller, less well-funded DB pension schemes, by 2026. This would be operated by the Pension Protection Fund but kept separate from the main PPF funds. The main aim is to provide an alternative end-game solution for schemes that might otherwise be unattractive to commercial consolidation providers.
The consultation focuses on potential eligibility criteria and sets out the proposed structure for the new consolidator. Currently, it is intended that the consolidator will operate like a superfund so that the link between the employer and pension scheme will be severed on transfer. It will also be structured as an unsegregated fund, on a run-on basis. It is further proposed that the consolidator would pay the full actuarial value of member benefits but under a small number of standardised benefit structures. In terms of funding, it is anticipated that a minimum funding level would be imposed similar to that currently proposed for commercial superfund consolidators, and that would dictate the entry price. Any deficit on entry would have to be paid by the employer over time under a separate contractual agreement.
The Government is asking the industry additional questions on possible options to underwrite the new consolidator - either by the Government itself or by PPF general reserves. The consultation also includes a survey for DB schemes aimed at gathering information on the level of DB schemes' interests in these new policies to inform the final design. Schemes have until 19 April 2024 to respond.
Key takeaways
Unless you wish to respond to the DB survey contained in the consultation or the consultation more generally, there are no immediate steps for schemes to take at this time. However, if you have any queries, please speak to your usual Baker McKenzie contact.
