SPONSORED: ‘Unlocking pension power to boost the UK’s fortunes’

SPONSORED

Hundreds of billions of pounds are locked away in UK pension schemes, when a simple change to pension rules could release this money to be invested in improving our country’s fortunes.

Unlocking this surplus could improve outcomes for pension scheme members, boost the economy, and support public services – without raising taxes or increasing borrowing.

The government needs practical and credible policies to get growth going that are rooted in the real economy. This is a lever that hasn’t been pulled, hiding in plain sight, inside defined benefit (DB) pension schemes.

£220 billion sitting idle while the economy needs investment

DB pension schemes, which pay a pension for life, hold more than £1 trillion of assets. Many now have vastly more money than they need to pay every pension they owe – one industry estimate suggests they hold as much as £220 billion in excess reserves.

This money already exists, having been saved by companies and people throughout their working lives. It is invested for the long term, UK-based and stable. And, by definition, surplus assets are beyond what is needed to pay pensions to members. Yet under current rules, most of this surplus is locked away.

The government has taken steps to free up these assets, but its own impact analysis estimates its policies will release less than £10 billion of that £220 billion surplus. This is a huge missed opportunity.

How it works

When DB pension funds have excess money they can decide to either keep going (“run on”), or “buy out”. “Running on” means that they continue to invest their funds, and this can include in things like housing, transport, energy and defence – projects that make up the real economy. To “buy out” means transferring their assets to insurance companies, which in turn guarantee to pay the pensions.

Traditionally, DB pension funds have aimed to buy out because it guarantees that their obligations will be met. But in doing so, surplus assets are handed over to insurers – and the potential for those surplus assets to be used for other purposes is lost.

Keeping pension schemes running on means members could enjoy better benefits over time, which does not happen once schemes are handed over to insurers. And if surplus assets are released, the government would receive a portion in tax revenues.

Unlocking surplus could therefore deliver better outcomes for pensioners, provide financial support for companies that want to invest, and give the government’s finances a real boost.

Making it safe: full protection for members

But what if something goes wrong later, and a DB fund’s investments fail, meaning its surplus is wiped out?

That concern over the security of people’s pensions must be addressed directly. The answer is 100% protection from the Pension Protection Fund (PPF). The PPF protects pensions when employers fail. At the moment, this protection is only partial.

In reality, many DB schemes are in such a strong position that they are very unlikely to need PPF protection. But without full protection, scheme trustees remain nervous, given the remote possibility of an extreme worst-case scenario occurring.

With full PPF protection in place, trustees would have confidence they can invest their surpluses without needing to store up an excessive emergency buffer. Strong safeguards would remain in place: the Pensions Regulator has set out very clear guidelines for investment, and no corporate sponsor wants to be forced to shore up its pension scheme, so trustees would be expected to remain prudent.

The PPF already protects large numbers of schemes and is well funded, itself sitting on a surplus in excess of £10 billion. Extending its protection is feasible, affordable, and would get money flowing into the UK economy quickly.

A wider economic benefit: supporting the gilt market

This also has potentially huge implications for UK government debt – the famous gilt market. Because the UK government is a very reliable payer, DB schemes hold lots of gilts: they typically buy and hold them for decades, secure in the fact that the government will pay the interest on them.

But if pension schemes continue to hand all their assets over to insurers as soon as possible, as has been their strategy for many years, their gilts will ultimately be sold by those insurers.

Over time, this is likely to push up the cost of government borrowing for reasons that have nothing to do with how well the government is managing public finances. So “running on” can both boost real investment into the UK economy and help keep down the cost of government borrowing.

A growth story the government can lead on

There is no other pool of UK savings like DB pension schemes. They hold over £1 trillion in assets; they are long-term investors; and they are clearly and effectively regulated.

Unlocking DB pension surpluses responsibly is practical, fair and pro-growth. It helps pension members, workers and employers, it supports the gilt market, and it boosts the wider economy. There are not many levers the government can pull to unlock £200 billion.

All it needs is one simple change.

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