30-05-2025
Final salary pensions at risk from Labour tax raid
Labour is set to remove restrictions that currently protect pension savings from being funnelled into risky investments.
Under new plans the Government will allow pension funds to draw down money that is surplus to the amount required to cover a scheme's liabilities.
But critics have warned the move would put millions of final salary pensions at risk, and may even see businesses dipping into pension pots to improve their cash flows.
The reforms, announced on Thursday, will allow 'surplus' funds to be invested back into businesses, removing existing safety measures that protect pensions from riskier investments.
Approximately 8.8 million people are members of defined benefit schemes, which currently have a collective surplus of £160bn, according to consultants Hymans Robertson.
Under the plans, any money drawn down by businesses would instantly be hit with a 25pc tax charge, providing a much-needed boost for the Chancellor as she seeks to avoid breaching her own fiscal rules.
If the full £160bn were drawn down using the new freedoms it could raise as much as £40bn for the Treasury.
Critics have urged ministers to rethink the plans. Dennis Read of Silver Voices, part of the new campaign group Pension Security Alliance, said: 'If a company has cash flow problems it will be tempting to raid the pension fund, claiming that the purpose is investment, so leaving the scheme underfunded and unstable if the company collapses.'
Options for using the cash include paying more to shareholders, increasing spending on their business or making investments elsewhere.
Schemes can already distribute their surpluses, but strict rules designed to protect pensions at all costs make it rare.
However, any access to surplus funds must first be approved by the trustees, who in turn will need to ensure actions are in 'members' best interests' which could place a high bar on when the new powers can be used.
The Pensions and Lifetime Savings Association welcomed the announcement, adding that surplus release by schemes could provide an opportunity to improve member benefits, boost contributions into defined contribution schemes, and support new types of investment. However, the association said measures needed appropriate protections for savers.
A former pensions minister, Sir Steve Webb, now a partner at firm LCP, said the changes could result in spare cash being used to improve benefits for existing members, for example by providing better inflation protection on schemes relating to service before 1997.
John Ralfe, independent pensions consultant and chair of two pension schemes, added: 'The detailed regulations that ministers are proposing must make sure member security is the absolute priority.
'Surpluses must be defined on a tough basis. Scheme assets must also match liabilities to minimise the risk of market movements causing any future deficit.'
The Government's plans were set out last year in a Department of Work and Pensions paper that said ministers would consult on the details of surplus extraction plans.
The reforms come as the Government announces it is legislating for a reserve power within the upcoming Pensions Schemes Bill that will allow it to mandate pension scheme investments to drive capital into UK assets and boost growth.
The Treasury was approached for comment.
