Reforms may ‘unlock £50 billion in pension surpluses’

The UK government is considering significant reforms that could allow listed companies to access up to £50 billion from their traditional staff pension schemes.

Changes are being considered due to the recent shift in gilt yields, which has transformed many workplace pension schemes from deficits into surpluses.

An analysis by Barnett Waddingham reveals that FTSE 350 companies’ pension schemes hold approximately £50 billion in assets, exceeding the 105% funding level set by The Pension Regulator for self-sustainability.

The Department for Work and Pensions issued a consultation on relaxing rules for scheme sponsors to withdraw surplus cash from their defined-benefit schemes. Currently, such withdrawals are only allowed after scheme wind-up or through a buyout, subject to a 35% tax rate.

What’s more, Jeremy Hunt has proposed encouraging pension schemes to invest in riskier “UK productive” assets if sponsors can more easily access surpluses. Trustees of closed schemes are cautious about allowing surplus outflows, considering the strength of the sponsor’s covenant as a key factor.

The £50 billion represents about 10% of all FTSE 350 defined-benefit assets and two-thirds of the annual dividends paid by these companies in the previous year. Some notable FTSE 100 companies, including HSBC, NatWest, Sainsbury’s, and Tesco, may benefit from these potential changes.

Mark Tinsley, principal at Barnett Waddingham, which advises 25% of FTSE 100 companies, said:

“Many pension schemes have seen large improvements in their funding positions over the past year and now have significant surplus funds. Sponsors stand to benefit considerably if the rules around returning surplus funds are relaxed, as is being considered under the Mansion House reforms.”

Any reforms should ensure members of pension schemes are not adversely affected.”

The Pensions Regulator previously noted that around a quarter of all defined-benefit schemes could now buy out their liabilities with insurance companies. Barnett Waddingham also estimates that over a third of FTSE 350 defined-benefit schemes were fully funded for buyouts as of May 31st.

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