NEWS   |    December 4, 2023

The Chancellor’s Autumn Statement: Are there hopeful signs in the fight against the pension surplus problem?

In his Autumn statement, the Chancellor announced that the government will consult on changes to the rules around when defined benefit pension scheme surpluses can be repaid, indicating that it will look to introduce measures to overhaul the current regime, whilst also reducing the current tax rate on extracted surpluses from 35 per cent to 25 per cent.

Extracting surpluses from schemes is often not possible under the rules of many defined benefit pension schemes, and in cases where it is possible, the process is often complex and requires the involvement of the Trustees of the scheme, which may be particularly problematic where there is a strained relationship. The tax charge has been another problem with extracting surplus. This charge was put in place at a time when corporation tax rates (ie the tax saved when making pension contributions) were much higher and so it seems to be disproportionate in today’s financial climate. These constraints have naturally influenced employers’ behaviour towards scheme funding, to the extent of discouraging investment out of fear that they may not be able to extract the surplus once the pension scheme has been wound up. It has also had the effect of making employers hesitant to move to buy out, particularly in recent times where schemes are generally better funded and in a surplus.

Whilst the precise detail of the changes to the current regime is not yet known, there is hope that, coupled with the tax reduction, these changes will have the effect of incentivising employers to commit more funds to their scheme, which will lead to improved growth and member outcomes.

The proposed new measures are certainly a big step in the right direction, but there is still a long way to go to tackle all of the remaining issues surrounding pension scheme surpluses. Whilst the announcement signals the government’s clear intention to support and stimulate increased investment in defined benefit schemes, many of these changes will require consultation with various stakeholders, and as such the announcement does not guarantee a concrete change for the better any time soon.

Rosalind and Riccardo’s article was originally published in The Legal Diary, here.

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.

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