The UK government is being called on by asset managers to prioritise reforms to the £1.2 trillion defined benefit (DB) pensions sector, potentially releasing billions of pounds for investment in British infrastructure and high-growth companies.
While the government recently announced plans for “megafunds” within defined contribution (DC) and local government pension schemes to drive investments, it has yet to address corporate DB schemes.
A consultation earlier this year explored allowing companies to access surplus funds, which could enable greater investment in higher-risk, productive assets.
Unlocking Billions for Investment
Jos Vermeulen, head of solution design at Insight Investment, which manages £665 billion in UK assets, stressed the urgency of focusing on DB schemes. “There’s scope for up to £100 billion to be released in the next 12 to 24 months,” Vermeulen said, describing this as a “once-in-a-generation opportunity” to revitalise the UK economy.
Owen McCrossan, head of investments at abrdn group pension schemes, echoed this sentiment, noting that a modest 5% allocation to productive assets such as real estate and infrastructure could raise an estimated £50 billion.
This amount matches the government’s 2030 target of driving £50 billion into productive assets through the consolidation of DC workplace schemes into funds exceeding £25 billion in assets.
Calls for Legislative Action
Industry experts are pushing for DB pension reforms to be included in the pensions bill expected next year. These changes, they argue, could incentivise schemes to take on more risk and invest in UK infrastructure and growth companies, particularly given the improved funding positions of many DB schemes.
Vermeulen suggested enhancing the Pension Protection Fund (PPF) to cover 100% of pension obligations if a scheme fails, up from the current 70-90%.
This move could be paired with incentives, such as waiving the PPF levy for funds that allocate at least 5% of assets to British infrastructure or scale-up businesses.
Challenges and Opportunities
Currently, many corporate DB schemes are closed to new members, leading them to adopt less risky investment strategies or transfer their obligations to insurance companies.
A record £60 billion of such transactions occurred last year, according to the PPF.
However, if reforms allowed for surplus extraction and guaranteed full PPF protection, schemes could be encouraged to “run on” and invest in productive assets rather than winding down.
The Investment Association has supported these reforms, suggesting that surplus extraction, with safeguards, could incentivise schemes to take more investment risks.
Government Review Underway
The Department for Work and Pensions confirmed it is reviewing responses to the earlier consultation on DB schemes and expects to make a decision on surplus flexibilities in the coming months.
As the UK seeks to revitalise its economy through domestic investment, reforming the DB pension system could provide a vital source of funding for infrastructure and high-growth sectors while offering schemes and their members enhanced opportunities.
