I imagine that many of us greet news about DB scheme surplus extraction with “what does this mean? Is it dangerous? Surely taking money out of DB schemes is bad for members and an unfair treatment of their contributions?” At least, that’s what I thought at first. So I have done a little research in this area and thought it might be helpful to set out what is going on and answer the key questions people might have.
What is surplus extraction?
Quite simply, surplus extraction is about allowing sponsors/trustees of DB schemes who have significant funding levels above those needed for long-term survival to take some of the money out of the scheme and repay it to the sponsoring employer. This repayment would be taxed.
Why is it being explored?
Remarkably, we’ve moved away from the position of private sector DB schemes struggling, going bust and/or needing large cash injections from sponsors to survive – to one where 3,750 out of the around 5,000 private sector DB schemes are in surplus on a low dependency basis. (Low dependency basis means a minimal need for the sponsoring employer to make contributions going forward). The Government hopes that allowing surplus extraction will encourage well funded schemes to run-on (stay managed by the employer) rather than transferring liabilities through buy-out.
How will it affect members?
If done correctly, it should not affect pensioner income levels, as it can only be done with an assurance from trustees that schemes will remain at healthy funding levels.
What about member contributions?
What about the contributions members have made? Is surplus extraction a way of taking member contributions and returns on these and using them to boost an employer’s business? Well, no, not exactly. Those withdrawing surplus will be required to carefully assess where it comes from so as to not act unfairly towards members. We need to remember that over the past decade or so, the Pensions Regulator has required a large number of DB scheme sponsors to make cash injections into their schemes in order to improve funding levels. Therefore, in many cases, surplus extraction will involve repayment to employers of previous supplementary contributions.
Is this part of the Government drive to pursue greater UK investment?
The Government is not specifying that surpluses need to be used in a specific way, but the hope is that these cash injections will operate as investments in these companies and encourage growth, ultimately helping GDP increase. The Government also hopes that allowing surplus extraction will encourage schemes to invest more for growth, though there is no guarantee that this would be through UK assets.
What are the next steps?
Rachel Reeves has announced that the Government will allow surplus extraction in the future. It is considering the responses to its consultation and will set out guidelines in the spring.
I’m sure we are all excited to see what these will look like!
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