Mansion House Reforms: Government must consider ways to protect pension funds

Commenting on reports that the government wants to unlock £50bn of pensions surplus from listed companies’ pension funds (The Times, August 21), Donald Fleming, pensions restructuring advisory partner, RSM UK, said: ‘Following regulatory pressure, the pensions industry has spent the past decade and a half de-risking pension schemes’ exposure to equities and investing into gilts and bonds to reduce perceived asset volatility and the sponsoring companies’ ability to support investment volatility. Through following regulatory guidance, the industry has de-risked and got itself in a great place to secure member benefits for the future, as many are now approaching buy out.

‘The policy shift in last autumn’s mini budget triggered a sharp rise in gilt yields, which have now continued to rise due to several other economic factors, meaning many schemes suddenly found themselves in an ongoing funding surplus, with many in a surplus on a buyout basis. Understandably, sponsors would like to recover trapped surpluses so, now that we are in a different long term yield environment, a policy re-think makes sense to help companies and their pension scheme trustees work out together the best way to allocate capital, given their respective responsibilities. 

‘The government sees this as an opportunity for pension schemes and companies to invest in what it sees as ‘productive’ for the wider good. Removing barriers to such investment - for example by removing the tax penalties on extracting pension surpluses – seems a sensible way to level the playing field. However, the government looks to be going further, effectively reversing the current de-risking approach, by encouraging pension trustees and sponsors to take on new risks from investment - potentially in venture capital and equity. If this goes ahead, the government must consider how the system will protect pension funds if surpluses reverse, or the investments don’t work out as planned.’ 

RSM head of pensions, Ian Bell added: ‘This approach has echoes of the Gordon Brown tax raid on pensions in 1997, justified on the basis that defined benefit schemes were well funded and many were in surplus. This move triggered over two decades of funding demise, with funding pressure placed at the door of employers. Surely trustees will be wary and not allow events to repeat themselves if there is any risk to funding and scheme members’ long-term security?’