LCP powering possibility in pensions

A proposal for positive reforms to regulation of the UK’s DB schemes

This page was originally published on 23 July 2023, subsequently updated on 22 November 2023 following the Autumn Statement and on 19 April 2024 following the government's Options for DB Schemes Consultation.

This page provides detailed information on our exciting pension policy proposal. We believe this proposal will bring considerable benefits to pension scheme members, employees, employers and the UK economy. In the Chancellor’s Mansion House speech on 10 July 2023 he launched a Call for Evidence on our proposal. 

In the Chancellor's Autumn Statement on 23 November 2023 he announced that the tax rate on pension surpluses that are returned to employers will be reduced from 35% to 25% from April 2024. 

On 23 February 2024 the DWP published a Consultation on our proposal (among other options). We understand that opposition parties are also exploring ideas for ways in which pension assets could be more productively invested. Our response to this consultation is linked here and below.

Additional information and resources can be found below.  

Executive summary of LCP’s proposal

For decades, the UK’s policy and regulatory focus for DB pension schemes has been on protecting members’ pensions. This focus is entirely understandable against a backdrop of large deficits and (in some cases) risky investment strategies. It has resulted in large volumes of funds being paid into pension schemes and substantial de-risking of investment strategies. Partly as a result of these measures, and partly as a result of large changes in investment markets, many pension schemes are now finding themselves very well-funded. Security of pension benefits is far less of a systemic concern than it has been over recent decades.    

In these changed circumstances, we believe now is the time to consider whether there is a better way for some schemes to be run. Do the best-funded, well-run schemes really need to invest in such low-returning assets to provide pension security? Could their collective hundreds of billions of assets be unlocked to invest more freely for growth, benefiting all stakeholders without compromising on security for members? 

To answer these questions, we have imagined a new regulatory regime for well-funded private sector DB schemes, that would operate with just two key changes to primary legislation: 

• Under our proposed new regulatory option, sponsors and trustees of well-funded DB schemes could choose to opt-in to pay an additional levy (a ‘super-levy’) to the Pension Protection Fund (‘PPF’), in return for which 100% of members’ benefits would be protected in the unlikely event of sponsor insolvency (we refer to this as ‘super-protection’). With full member benefits protected, the scheme could then be free to invest more for long-term growth.
• As well as using pension scheme funds more productively, this would be expected to generate growing surpluses in schemes. When surplus funds exceed a specified level (a ‘super-surplus’), we propose that the excess could be used to enhance member benefits and/or be withdrawn by the sponsor to support higher DC pension contributions or further investment in their business. This key feature of our proposal addresses the imbalance of the current regime where employers currently have little incentive to support long term growth in pension schemes, because they have little access to any upside.

In our view, the benefits of our proposal are highly attractive, with little downside:

• Free up pension scheme assets to invest for more growth – surplus monies can be used for higher member pensions, better DC pensions, and/or UK business growth.
• An opportunity for DB pension assets to better support productive finance, including long term growth of UK companies, UK infrastructure, and supporting the UK’s energy transition to net zero.
• Improve the level of pension security for DB members, in a more efficient way than requiring every scheme to adopt low-returning investment strategies.

Key features of our proposal are that schemes continues to operate with current trustee and employer obligations, it doesn’t risk significant market upheavals, doesn’t put undue financial or operational pressures on the PPF, and complements other areas of pension policy.

The following content provides detail on our proposal:

• Read LCP’s response to the Department for Work and Pensions consultation on options for defined benefit schemes
• Listen on-demand to our webinar which we held on 26 March on the DWP consultation: new strategic options for DB pension schemes.
• Our blog following the government's Options for DB Schemes Consultation on 23 February 2024: New strategic options for DB pension schemes.
• Our press release that was published following the Autumn Statement.
• Our FAQ document that answers detailed questions we have been asked about our proposal from a wide range of interested parties, including TPR, PPF, government, trustees, employers, lawyers and other actuarial consulting firms. This includes considerable detail on how we envisage the option would work in practice, our view of how TPR and the PPF might view the regulatory risks of the proposal, and why we think it would fit well as an additional option within the current pension regulatory regime.
• An introductory video from LCP Partner, Sir Steve Webb:

• Watch our on-demand webinar: Mansion House reforms – Time for change in DB pensions? With Sir Stephen Timms MP. 
• Press release from 1 September 2023: Getting DB schemes to take more investment risk requires ‘secret sauce’ of enhanced PPF protection for members.
• Read LCP's response to the DWP's Call for Evidence on Options for DB Schemes.
• Our response to the Work and Pensions Committee submitted on 26 April 2023 that provides background and explains our proposal at a high level.
• Our press release following the Mansion House speech. 
• Our 10 July 2023 podcast episode on the proposal. 
• Our 24 May 2023 on-demand webinar where we discuss our proposal.

Note: Whilst we have set out considerable detail in key areas, we have deliberately not set out complete detail in every area as ultimately the detail will depend on policy objectives of government, TPR etc. The way in which our proposal will work for a particular pension scheme will also depend on the detail of that scheme’s “rules”, and the nature of the relationship between the sponsoring employer and the trustees. What we have done is to formulate a proposal that we believe works at a fundamental level, balancing the needs of economic growth with security of pensions and fairness between generations. We are happy to share our analysis on key aspects further in collaboration with TPR, PPF and Government as the discussion evolves, and we are confident that our proposal can be made to work whilst balancing the needs of all key stakeholders.