What happened?
. REFORMS: Sky News and the FT report that UK Finance Minister Rachel Reeves will announce plans on Wednesday to allow companies to access surplus assets in Defined Benefit pension schemes. The intention is that this will encourage them to deploy more assets into investments that benefit the economy.
. QUANTUM: According to Sky News, Government sources say this could unlock GBP60bn, while other estimates suggest the figure could be in the region of GBP100bn. The Penson Protection Fund reported that the UK DB sector had GBP219bn of surplus assets in March 2024 (s179 basis for the liabilities, which approximates an insurance buy-out value).
. CONTEXT: These reforms take place in the context of the previous Government considering measures to ease companies'' access to pension scheme surpluses, although we get the impression that Reeves'' reforms are potentially further reaching.
BNPP Exane View:
. UNCERTAINTY: At this stage it is highly unclear how the mechanics of the proposal will work - for instance, what the role of pension scheme trustees will be in authorising surplus releases, how schemes with different rules will be affected, whether some of the released capital will accrue in benefits to the pensioners, what the tax implications of the release would be, or how ''surplus'' is to be defined (given the significant difference in the IFRS, actuarial, and buy-out views of funding positions). Without details on this, it is difficult at this stage to assess the extent to which corporate incentives and behaviour might change.
. BPA IMPLICATIONS: While there are many uncertainties, whatever the specifics may be, the release of surplus capital to sponsor companies could mean there will be less surplus available to fund bulk purchase annuities (BPA) from insurers. And in the near term, while it is unclear what the specific proposals are, we could see a slowdown in BPA business until the changes are better understood. Indeed, the market in 2024...
