On 22 November 2023, the Department of Works & Pensions (DWP) published a response to its call for evidence on how DB pension schemes could use their assets more flexibly.
The call for evidence focused on three areas:
- DB investment in productive finance, including international comparisons and incentives for trustees to invest more in productive finance;
- building surplus, including current and potential future conditions for extraction of surplus from DB schemes, encouraging scheme investment in productive finance, and transferring surplus between DB and Defined Contribution (DC) schemes where an employer sponsors both types of scheme.
- public consolidation, including the need for and potential impacts of a public consolidator on the current DB pensions landscape, a potential role for the Pension Protection Fund (PPF) as a public consolidator, the potential impact of a public consolidator on productive finance investment, and the mechanics of a potential public consolidator.
With the assistance of AREF's Public Policy Committee, AREF submitted a response to the call for evidence on 5 September 2023. This focused on our observations regarding disincentives to trustees and sponsors of DB schemes to consider investing in productive assets. We pointed out that investments in assets that do not fit within the Solvency II Matching Adjustment regime are generally not attractive to participating insurers. Without change, DB schemes will continue to dispose of productive assets to facilitate transfers to insurers. Also, we asked for wider range of options for DB schemes. Consolidation of DB schemes would allow greater access to the skills needed to invest in less liquid assets. It may also facilitate the run-off of pension liabilities outside an insurance regime and this may, in turn, facilitate greater investment in productive finance.
In the Government's response, they noted that "As the funding position of many DB pension schemes has improved, many schemes have pursued insurance buy-out as a long-term solution to securing member benefits. While we believe that buy-out will remain an attractive option for many schemes, responses to our call for evidence suggest 'running on' may have benefits for sponsoring employers and the wider economy. We are keen to work with all stakeholders to ensure extracting surplus that may build up if such schemes are investing in productive assets can be made easier, while always protecting member benefits."
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