Our response to call for evidence on Defined Benefit pension schemes

On 11 July 2023, the Department for Work and Pensions (DWP) issued a call for evidence (CfE­) on how private sector Defined Benefit (DB) schemes could provide capital for growth businesses and support the UK economy. The CfE is an integral part of the Chancellor's Mansion House speech delivered by Jeremy Hunt on 10 July 2023.

Some key headlines of the CfE are as follows:

• The DWP asks whether UK DB Schemes are underinvested in productive assets compared to international comparators Simmons says: There is a wealth of evidence that this is the case. There has been a host of legislative and financial drivers over recent decades which have caused DB schemes to close to future accrual, de-risk their asset allocation and target an insured buy-out.

• The DWP questions whether the difficulties corporate sponsors have in obtaining a refund of surplus have encouraged a shift away from productive assets Simmons says: Yes. The legislative and tax regime has resulted in pension schemes becoming a "one way valve" from an employer perspective. Refunds of surplus generated by taking further investment risk are subject to onerous statutory conditions and then taxed at 35%. Further, some scheme rules prohibit refunds of surplus.

  We believe there is room to amend legislation to make investing for surplus
  more attractive, whilst maintaining appropriate protection
  for members. One option could be to permit employers to direct, on a
  tax neutral basis, any surplus generated in their legacy DB scheme
  into their separate DC arrangements for current employees.

• The DWP then asks whether further DB consolidation, and setting up a public consolidator (potentially run by the Pension Protection Fund (PPF)), would encourage more investment in productive assets Simmons says: Yes - economies of scale should facilitate a return to investment in productive finance. A new public consolidator could also help invigorate the market. We do have some concerns, however, that the PPF would not be the most appropriate body to run a new public consolidator.

Our detailed response to the CfE can be found here.

To discuss further, please contact Ed Smith or Danny Tsang.