Unlocking the £1.5tn of assets in DB pensions could power possibilities for UK plc – LCP

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The UK should now adopt a more ambitious approach to managing well-funded DB schemes, viewing them as an opportunity not a problem, according to LCP.

DB schemes are now in a position of strength as funding reaches record levels. Under current regulations, many schemes are now driven to now targeting ultra-low investment returns. But LCP argues that this drive to take the risk – and return – out of DB pension investments may now be going too far. Will this represent a “missed opportunity” to better invest £1.5tn of UK DB pension scheme assets?

To maximise these opportunities, LCP has developed over the past year a new “opt in” system for well-funded DB schemes, with two key changes:

  • In return for payment of an additional levy, PPF cover increased to 100% of member benefits, building on the proven success of the PPF approach.
  • Ability to extract surpluses on an ongoing basis (with suitable protections) to fund improved DC savings, invest in UK plc and boost DB member benefits.

This could deliver three key benefits:

  1. Full protection to DB members’ benefits in a more efficient way than complete investment de-risking.
  2. Create an incentive for schemes to invest for growth, deploying the huge DB asset base to support the UK economy and transition to net zero.
  3. Opportunity to generate hundreds of £bns of surpluses to share between DB members, DC savers and investing in corporate Britain.

Steve Hodder, Partner at LCP, commented: “For 20+ years, regulatory focus has been on “slowing down” DB schemes through reducing investment risk. This was right when schemes were generally poorly funded and running risky investment strategies. 

“But the situation has now fundamentally changed, and I think the “slow down!” mantra is becoming dangerously ingrained. DB schemes are now slowing to a standstill, which is a disproportionately costly way to manage ever-diminishing downside risks.

“It is time to re-adjust our focus and adopt a mindset of ambition and opportunity. With member protection provided in a more efficient way, schemes can be “unlocked” to invest for moderate growth, potentially generating hundreds of billions of pounds to benefit UK savers and the economy.”

LCP will host a webinar on Wednesday, 24th May, to explain this idea and investigate how it might become a reality. 

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