Additional changes to pensions rules will “unlock billions of pounds” of “trapped surplus funds” for the wider economic good, ITV News Economics Editor Joel Hills discusses
Further. Faster. The words are beginning to sound like a magical incantation.
The prime minister and the chancellor are out and about promoting yet another part of a, still unfurling, plan to raise economic growth and productivity and, with them, living standards.
Additional changes to pensions rules will, we’re told, “unlock billions of pounds” of “trapped surplus funds” for the wider economic good.
The plan relates to defined benefit (DB) pension schemes, also known as “final salary” schemes as they often guarantee a specific income in retirement based on salary or length of service.
Most private sector companies have stopped offering DB schemes to their staff because they are expensive – in large part because people are living longer – but they are more common in the public sector where the government bears the long-term financial risk.
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There are 5,000 remaining DB schemes in the private sector.
Three quarters are currently in surplus to the tune of £160 billion – that is to say there is more than enough money set aside to make good on the promises that have been made to current and future retirees, based on actuarial estimates of life expectancy.
The government sees these surpluses as “trapped” money which, if released, could flow into employee pay, business investment or additional benefits for pension members.
Theoretically, the potential economic boost is huge. But there are buts.
Surplus money could be deployed for growth-rich investment. Less usefully, it could be used to help fund dividend payments or share buybacks.
And pension trustees, who oversee and manage DB schemes to ensure they deliver the promised benefits for members, have a duty to be cautious.
The steep rise in interest rates since 2021 has helped to propel many DB schemes from deficit to surplus, but rates can go down as well as up.
And if a company ends up bust and unable to make good on the future promises it has made, then the Pension Protection Fund will only cover 90% of future benefits for the not-yet retired – as members of the BHS and Carillion schemes found out.
The government may be feeling bullish and intrepid but trustees are likely to be more hesitant, vetoing ideas they don’t like.
Changing the rules may not “unlock” anything like £160 billion for investment, we just don’t know.
Perhaps sensibly, the Treasury refuses to put numbers on what it thinks changing the existing regime will do for economic growth or employment.
It’s extremely hard to say how big a deal this will prove to be.
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