New government rules will make it easier for employers to access extra cash in pension schemes and could see savers get a boost to their pensions
New government rules will make it easier for employers to use extra cash they have built up to pay for their employees’ pensions – and it could mean you get a better income in retirement.
The Government confirmed this week that it will make it easier for companies to dip into the cash reserves held by their defined benefit (DB) pension schemes, which pay savers a guaranteed income for life.
With these types of schemes, you don’t pay into your own pension pot and instead your employer is responsible for managing a series of investments in order to pay you a pre-agreed annual income in your later years.
Although most savers now save into defined contribution (DC) pension schemes – where an employee pays into their own individual savings pot – there are still around 9.6 million people who are in DB schemes, according to the latest government figures.
Over the past few years, many of these schemes have built up large cash reserves beyond the amount they need to pay their obligations, leading to calls for them to be able to access the money to spend on their businesses or to benefit pension scheme members.
Some companies were technically able to do so before, but stringent rules meant that not many took the risk of doing so.
The new rules lower the threshold at which pension trustees – the people responsible for managing the best interests of scheme members and employers – can access the cash.
While the change is good news for companies, experts have highlighted that it could also be good for savers, as in some cases these surpluses are used to pay better pensions than expected.
The Pensions & Lifetime Savings Association (PLSA) said surplus release by pension schemes “could provide an opportunity to improve member benefits and boost defined contribution pension contributions”.
For example, pension schemes could look at improving the amount members’ pensions rise each year in line with inflation, even when their employees are not expecting this.
Dave Brooks, head of policy at pensions consultancy Broadstone, told The i Paper that he has already seen some evidence of schemes using their surplus to benefit savers.
For example, he said the Church of England has shared some of its surplus with its pension scheme members.
However, he added that he was sceptical that the majority of employers would take a similar approach.
“While welcome for those individuals, it remains to be seen whether this will become more commonplace,” he said. “My sense is that there will be a few cases, but it is unlikely [that most schemes will].”
The Government has said any decision to draw on surplus from a scheme will remain with scheme trustees.
David Hamilton, also of Broadstone, said his firm is “delighted to see that such surpluses will only be released at the discretion of trustees, and the Government have acknowledged that a focus on safeguarding member interests is essential when considering such payments”.
Some pensions experts, however, are concerned that the new rules will not safeguard member interests but could actively put people’s pensions at risk.
Campaign group the Pension Security Alliance, which is made up of charities and pension firms, said extracting money from pensions “will reduce security for members” as it could run the risk of the schemes being short of money in future if their financial conditions change.
More details about how these rules will work will be included in the upcoming Pension Schemes Bill, expected to be published in June.
