Government plans to allow companies to extract cash from defined benefit (DB) pension schemes could put schemes at risk of under-funding and increase the chances of members not getting their full pension, an official government document has revealed.
Ministers last week published the Pension Schemes Bill, which creates new rules allowing employers to remove ‘surplus’ cash from pension schemes set up to support their retired workers.
An official Impact Assessment of the plans, published by the Department for Work and Pensions (DWP), reveals that ‘surplus extraction’ could creates risks to the retirement incomes of people who are members of DB pension schemes.
Around 9 million people are members of DB pension schemes.
The official confirmation that surplus extraction puts members’ pensions at risk was highlighted by the Pension Security Alliance, which is campaigning for pension scheme members to be consulted on changes that affect their pensions.
The Impact Assessment warns that surplus money in pension schemes helps protect members from economic shocks and removing it puts their pensions at risk if schemes don’t have enough money to pay their pensions.
It says: “If schemes choose to modify their rules to enable surplus extraction, this adds an indirect cost to members in terms of the increased likelihood of members not receiving their pension benefits in full.
“A scheme surplus can act as a financial cushion for members, to absorb unexpected costs or investment losses for the scheme. Without this cushion, the scheme may be more likely to struggle to meet its obligations to members, especially in times of financial stress or economic shocks.”
The assessment says that companies could use the extraction rules to improve their own finances at the expense of former employers’ retirement incomes: “Accessing a surplus may improve the employer financial position but may risk the pension scheme becoming underfunded. If sponsoring employers of underfunded schemes were to also become insolvent, these schemes may then transfer into the Pension Protection Fund (PPF), increasing its liabilities and may mean members potentially losing out.”
The Impact Assessment says that ministers want to ‘encourage’ employers to remove surplus money from schemes, but also contains repeated warnings that doing so will increase the risk of harm to scheme members.
Ministers say that pension schemes have around £160bn more then they need to pay out pensions to members, arguing that the money should be used by employers for their own purposes.
But this DWP’s latest document warns that pension scheme funding positions can shift significantly as economies and financial markets change, meaning today’s ‘surplus’ could be erased, leaving pension schemes in financial trouble.
The impact assessment says: “It is recognised that making it easier for schemes to access their DB surplus may present a risk to the market, members and the PPF. In particular, schemes may extract too much surplus. Schemes are currently benefiting from unusually high surpluses due to the macroeconomic environment. Any major shocks paired with high surplus extraction levels, could lead to schemes becoming underfunded.”
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