For the past couple of months, the DWP’s “Options for Defined Benefit schemes” consultation has been a hot topic of conversation in the pensions industry, and particularly the pensions press.

What was the DWP consulting on?

As a reminder, the consultation, which concluded on Friday 19 April 2024, was the most recent phase of the defined benefit side of the government’s Mansion House reforms (outlined in full in our earlier article).  Building on the findings of the earlier call for evidence in respect of options for DB schemes, the consultation covered two broad themes:

1. Treatment of scheme surplus

The DWP’s aim is to make it easier to extract surplus from DB schemes and share it with employers and DB members, in order to “support schemes to invest for surplus in productive asset allocations”.  Proposals in the consultation included introducing a statutory override to enable schemes to amend scheme rules / make surplus payments, and making changes to powers to make payments and / or tax provisions to make it easier to make payments to members.  Other questions included what safeguards should be provided for member benefits and what other barriers there might be to surplus distribution.

1. The model for a public sector consolidator (“PSC”) 

The government intends to establish a PSC, to be administered by the PPF, by 2026.  The aim is that the PSC will “provide an alternative endgame solution for DB schemes unattractive to commercial consolidation providers”.  The consultation focussed on the design of the PSC, including approaches to eligibility, structure, member benefits, governance and funding. 

What are our views on the proposals?

Its safe to say that the consultation has generated a bumper response from the pensions community – indicative perhaps of the excitement around this as an opportunity to revitalise the DB side of the industry, as well as some nervousness around the form and scope of the potential PSC.

In our Burges Salmon response, we focussed on the potential for reform of the laws around releasing surpluses to make run on a realistic and attractive option for DB schemes. Safeguarding member benefits should be the priority, and we think schemes should be required to retain a funding buffer to protect against adverse experience, but in principle we see running on schemes for the express purpose of generating surpluses as beneficial to DB members and employers alike - as well as potentially for employees with DC benefits, if flexibility to use surplus for this purpose is built in to the new regime. 

As we noted in our response, the most significant factor in relation to any decision to return / utilise surplus is the fiduciary duties of the trustees.  Therefore, as well as giving trustees the legal mechanisms to make release or use of surplus easier, in our view, any statutory measures will need to be supported by robust regulatory guidance or a Code of Practice, to empower trustees to reach those decisions. 

In relation to the PSC, we expressed some reservations about the proposals in their current form.  Although badged as a consolidator for those without an option in the commercial buy out / superfund market, as it stands there is no proposal for eligibility for the PSC to be limited in any way.  We also have concerns about the proposal that member benefits would be re-shaped on transfer into one of a small number of set structures – which we see as inconsistent with the approach other consolidators and insurers are required to take.  The potential for the current PSC design to adversely impact the commercial market is perhaps part of the reason we’ve seen a much more varied response to the PCS proposals from the industry.  It will be interesting to see how the DWP responds.

What happens next?

We’ve said before that there is a sense of momentum about the Mansion House reforms and we’re fully expecting the government to continue to push forward with reforms in the DB space. 

In terms of implementing any changes, the proposals in relation to changing the rules around use of surpluses seem to us to be much further progressed than those in relation to the PSC. There also appears to be much greater industry consensus around the surplus proposals in principle, albeit with nuances around exactly how they might be implemented.  We’d therefore anticipate the immediate legislative focus to be in this area, with the PSC subject to further consideration (and likely consultation) in due course.  That said, the government won’t be able to hang around for long if it is determined to meet its ambitious 2026 target for the PSC to be established.

If you have questions about the Mansion House reforms, running schemes on, treatment of surpluses or options for DB consolidation, please get in touch with me or with your usual contact in the Burges Salmon pensions team.