In today’s Autumn Statement, the Chancellor, announced a reduction in the tax charge for sponsoring employers when accessing surpluses from their defined benefit (DB) pension schemes from 35% to 25% from 6th April 2024. Alongside this, the government will be consulting on changes to rules around when scheme surpluses can be repaid. Nick Gibson, Senior Director, comments:

“For DB pension schemes and their sponsors, the potential impact of the measures announced today could be significant. 

For corporate sponsors, the changes could increase opportunities to unlock value from their schemes, and allocate additional capital towards their corporate growth strategies. In that way, the government hopes that this will help to accelerate investment into UK productive finance, recognising that there are many potential uses of the additional capital raised. This all comes in the context of uncertainty from sponsors around access to surplus. Our recent research revealed that the vast majority of CFOs are unsure of their scheme’s potential access to a future surplus* and how that could impact their DB scheme’s strategy. Introducing a tax benefit and providing greater flexibility for accessing any surplus would provide further incentive to revisit the potential value opportunity from doing so, thereby addressing this uncertainty.

From a trustee perspective, it will be important that any additional flexibility introduced around accessing surplus does not increase the risk to the security of member benefits. To that point, we welcome the proposed review of new mechanisms to protect members as part of the consultation into changing surplus rules.

The impact on schemes could lead to very different strategies. Where schemes continue to be restricted from accessing any surplus until wind-up, the tax reduction could accelerate the corporate desire to buy-out. However, where scheme surpluses can be accessed on an ongoing basis, there may be more incentive to run-on, providing that there are sufficient safeguards in place to protect member benefits as part of a comprehensive risk management framework and run-on strategy.

Overall, with many DB schemes enjoying improved funding levels, it has never been more important for companies and trustees to revisit their strategy and ultimate objective for their DB scheme. As part of that, companies and trustees need to fully understand their ability to access any scheme surplus, and how that could change if rule changes are introduced.”

*89% of CFOs said they were unsure or unclear on whether their company has the potential to access a future surplus; recent research by Cardano: New world, new decisions: The CFO perspective resolving DB dilemmas in a new funding landscape

• Autumn Statement
• Defined Benefit (DB)
• scheme surplus