Source · Select Committees · Work and Pensions Committee
Recommendation 10
10
Deferred
Explore ways to meet pension scheme members’ expectations for benefit enhancement
Conclusion
Improvements in scheme funding have given new prominence to the question of how to treat any surplus in the best interests of scheme beneficiaries. For example, there may be discretion after benefits have been secured on buy-out to enhance benefits before returning any remaining surplus to the employer. There may be options allowing scheme members and employers to benefit from surplus in a continuing scheme. Decisions can be for trustees, the employer, or both, in accordance with scheme rules. We heard from scheme members concerns that their interests would be overlooked in this process. DWP and TPR should explore ways to ensure that scheme members’ reasonable expectations for benefit enhancement are met, particularly where there has been a history of discretionary increases. (Paragraph 89) Governance
Government Response Summary
The government acknowledges concerns about member interests regarding surplus treatment and discretionary increases, noting existing TPR guidance for trustees. It commits to running a public consultation later this year to explore further changes in the area of trustee capability and governance.
Government Response
Deferred
HM Government
Deferred
The Government is committed to ensuring that schemes pay out the full value of their pension to each member, as set out in legislation. Some schemes go beyond the legislative requirements and, where requirements are set out in the rules of the scheme, these levels of indexation must be paid. Some schemes provide additional indexation on a discretionary basis, as set out in the Committee’s report. We recognise that improvements in the funding position of many schemes raises questions about how surpluses will be treated and whether the interests of scheme members are being overlooked, particularly in relation to discretionary increases. This may be particularly relevant when schemes are looking to buy out or reduce surplus. Employers and trustees must consider a range of factors, and act in accordance with scheme rules and legislation, when sharing surplus. Both may wish to consider the significant erosion of some pensions based on pre-1997 accruals, over recent years, when considering how members can benefit from surplus sharing. TPR has considered this issue in detail and has addressed the subject in its Annual Funding Statement 2024. TPR recognises that, with schemes experiencing better funding levels, trustees face a range of calls about how that funding could be put to its best use. TPR is carrying out more research into how scheme surpluses are being applied. For example, some employers are asking to reduce or suspend contributions, while members are requesting discretionary increases. When considering these requests, TPR’s guidance sets out that trustees should be mindful of the scheme’s overall funding position, the resilience of their investment strategy and the level of employer covenant support. When considering discretionary increases, TPR’s guidance states that trustees should consider the situation of those members who would benefit from a discretionary increase and whether the scheme has a history of making such awards. Governance Good governance is key to ensuring pension schemes are well-run in the interests of their members. Many are set up under trust, including most DB and many DC pension schemes, such as Master Trusts. This means that the role of trustees is vital. As well as being responsible for securing members’ benefits, trustees have a vital role to play in delivering growth, since they are responsible for deciding how scheme funds should be invested. We know most trustees are knowledgeable, well-equipped, and committed to their roles.11 However, there is always room to support trustee capability better. Against a landscape of fewer, larger, consolidated pension funds, with greater potential for systemic risk, it is particularly important that we work with TPR and wider stakeholders to consider how to give trustees additional support. To explore further changes in this critical area, we intend to run a public consultation later this year.