Businessmen are calling on the UK government to reform defined benefit pensions

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The UK government should prioritize reform of the UK’s £1.2tn defined benefit pension system to unlock millions of pounds for investment, according to asset managers.

In November the government announced plans for a series of “megafunds” across defined contribution (DC) and local government pension schemes to channel more investment into Britain’s infrastructure and fast-growing companies.

But it is yet to draw up plans for corporate defined benefit (DB) pension schemes, despite discussions from the previous government earlier this year which explored ways to allow companies to access the rest of the projects, which can encourage them to invest more in risky assets.

“We think it’s important that DB projects are valued – they have the potential to get money off the ground faster than other areas,” said Jos Vermeulen, head of solutions planning at Insight Investment, which manages assets of £665bn. in the UK.

“There is room for up to £100bn to be released in the next 12 to 24 months . . . This is an immediate opportunity to transform the UK economy. . . if you lose that opportunity it may disappear forever,” he added.

Owen McCrossan, head of investment for abrdn group pension schemes, said DB pension schemes were “definitely a pool of income that can help fill the gap in productive investments”.

A share of 5 percent of goods produced such as real estate “could raise about £50bn”, he added.

That’s the same amount the government hopes to invest in productive assets by 2030 under its plans to combine defined workplace projects into funding of at least £25bn of assets.

Calls for the government to change the rules on DB schemes come as it has delayed the pension adequacy review. The review was expected to set out plans to increase subscription pension savings rates, which the government hoped would drive more investment in the UK.

Vermeulen says it is important that the DB pension reforms are included in the pension law due in the middle of next year.

In an interview with the Financial Times last month, Pensions Minister Emma Reynolds said she was leading the reforms outlined in the workplace because it was “where the growth is”.

He pointed out that most of the organizations that defined the benefits of the pension were closed to new members and “naturally had a long term” as the plans continued with risk-free assets while they reduce or sell their pension obligations to the insurance company.

However, industry experts say the significant improvement in the financial position of defined benefit pension schemes in recent years meant that many were now in a position to take on more risk, if the rules it enabled companies and scheme members to benefit from it.

To encourage policies to “continue” and invest in productive British assets, Vermeulen proposed that the Pension Protection Fund cover 100 percent of the pension owed if the scheme cannot meet its obligations. It currently pays between 70 and 90 percent.

As a result, the PPF’s annual premium will have to rise, but the government can reduce the premium if the fund invests some money in British foundations or capital-generating companies.

“The government can say going forward, to encourage projects to invest in productive assets, if you invest 5 percent you pay zero tax,” said Vermeulen.

Companies have been rushing to offload their pension obligations to insurance companies in recent years, with a record £60bn of transactions last year, according to the PPF. But this would be delayed if the schemes would provide full coverage from the PPF and if the companies would benefit from the surplus.

In its response to the first phase of the pension review, the Investment Association, which represents the UK’s fund management industry, urged the government to “allow the safe withdrawal of residual funds” from DB schemes, even though they were is no longer available for review.

“Considering some of the security concerns about the withdrawal of benefits so that the security of benefits is not weakened, the ability to receive more income can provide an incentive to accumulate funds. “It’s a lot of risk-taking for investment, in line with the government’s broader objectives,” IA said.

The Department for Work and Pensions said it was reviewing responses from the previous government’s consultation on options for defined benefit schemes and a decision on benefit flexibility “will be made in the coming months”.