The river of gold

Alastair Meeks
6 min readDec 14, 2023

The politics of pension scheme surpluses

My first boss, a remarkable woman called Belinda Benney, often used to say to me that when we talk about pensions, people think old, they think grey, they think dull. But if each time you replace the word “pensions” with “money” (she used to say this with lip-smacking enthusiasm), suddenly everyone thought it was much more interesting. Today, I’m going to write about money.

It’s gone largely unnoticed by the general public that the nation’s multi-generation-spanning funding crisis in defined benefits pensions has now been solved. Is this because good news is no news? Is this because pensions professionals are lamentably poor at speaking outside their own circles? Is this because the public hear the word “pensions” when they should be hearing the word “money”?

I leave these questions to sociologists. Because the important point is that the nation’s multi-generation-spanning funding crisis in defined benefits pensions has now been solved.

The size of the success

Thanks to the Purple Book (and in my case, to Duncan Buchanan of Hogan Lovells for drawing these figures to my attention), we can see just how. As at March 2023, UK defined benefit schemes had a combined £1.371 trillion in assets. Their combined PPF liability value was just £929 billion. So there was a surplus on a PPF basis of £441 billion.

Even separating out the schemes that were in deficit, the aggregate deficit was just £2.3 billion. The PPF already had a surplus of £12.2 billion. We’ve got that covered handsomely.

This represents a big turnaround in the last few years. In 2012, JLT estimated that pension schemes combined were 85% funded, a deficit of £172 billion.

Let’s put those numbers into context. That combined asset value of UK pension schemes of £1.371 trillion is over half of the UK’s GDP. It is more than the government’s budget for 2023/24. So the fact that pension schemes are collectively in surplus is nationally highly significant. At a time when Britain doesn’t seem to be having much good news, this piece of spectacular good news needs far more attention than it’s getting.

And those numbers don’t take into account the schemes that have already been bought out. Cumulatively, more than £200 billion of pension scheme liabilities have been secured with insurers. That number could triple in the coming years. A handful of insurers, some recently established, will control awesome sizes of funds. The Prudential Regulation Authority has already expressed concern about concentration risk.

Such a gushing cataract of money needs to be channelled so that it flows safely and its power is harnessed constructively. This has policy consequences. Vast sums of money, hundreds of billions of pounds, are now potentially surplus to the requirements of funding defined benefit pensions. There aren’t many places where hundreds of billions of pounds are floating around.

The government’s plans

The public may not have noticed these developments but the government has been giving them attention. The government has no money to spend of its own: as journalist Tom McTague has noted, debt interest is now Britain’s second biggest government department, costing £116bn a year just to service it. And it has spotted a large source of funds that it hopes to be able to co-opt to its own purposes.

That is a big part of what lies behind the Chancellor of the Exchequer’s Mansion House agenda. He has the intention of encouraging greater investment by UK institutional investors in UK high-growth companies and he is pushing policies to encourage pension schemes towards unlisted securities.

He also is looking to improve efficiencies through consolidation. These plans still seem hazy. The current stated intention is to use the PPF as a consolidator “aimed at schemes that are unattractive to commercial providers.” So far, schemes that are fully funded on a buy-out basis have been able to access the insurer market and there are already consolidators aimed at schemes below that funding level. This looks set to be a damp squib unless the government is being particularly concise in its summary of aims.

Given the size of the assets we are discussing, the Chancellor’s plans seem very restrained. The concept is of “Expanding the range of quality investment vehicles, ensuring a sufficient range of opportunities for pension scheme investment in high-growth UK companies”, as the Chancellor and the Secretary of State for Work and Pensions put it in their letter to the CEO of the Pensions Regulator. These measures would if successful provide some benefit but they would not be transformative, because trustees could only commit a small part of their funds to such vehicles, given that trustee investment duties require them to invest appropriately to meet scheme liabilities.

From the government’s viewpoint, this is just as well. If trustees are to invest more of their funds in unlisted securities, they will inevitably invest less in other asset classes. Since one of the main asset classes of pension schemes is gilts, moves to other asset classes would tend to depress the price of UK gilts, making government borrowing more expensive. As noted above, UK government borrowing is already at a record high. This is not a minor point.

So the government has to tread carefully if it is to channel this torrent of private sector funds, for fear of creating a different set of major problems for itself. Are there alternatives?

Other ways forward

Given the current opinion polls, attention is focusing on Labour’s plans. Labour too are reviewing how the UK pension system works and Rachel Reeves has said that her aim is to ensure “it delivers full potential for British savers and UK plc”. That doesn’t really tell us very much. Such as we have been told about Labour’s pension plans relates to defined contribution schemes. But they aren’t where the biggest numbers are — not yet anyway.

A lot will depend how much appetite Labour has for controversy. If they are desperate enough for the funds, there’s one big move they could make on pension funds. They could nationalise them.

Unthinkable, you think? It’s already been thunk, and done, in Poland and Hungary in the last decade or so. Countries as diverse as Ireland, France and Portugal have taken some private pensions onto the public books.

Imagine if the government were to take on the assets and liabilities of all closed defined benefit pension schemes. The members would have the benefit of a government guarantee. Their sponsoring employers would no longer have the contingent liability. And the government would have a stonking great collective surplus.

Now, the observant will note that the funding surplus figures given in my first post are on the PPF basis rather than a buy-out basis. Set against that, the government’s covenant is such that it can adopt much less cautious approaches to valuing pension liabilities (and it does so already for its existing unfunded liabilities) and the investment strategies that it can follow appropriately can reflect that too. The government should still be doing well out of such a deal.

So at a stroke, the government would have its own state fund. It could if it so wished cancel some of the gilts that it held in that state fund (no point in owing money to itself): instead of the problem of government costs going up because of a reduced need for gilts, the government would benefit from the ability to liquidate a lot of them. And its new state fund could carry out all the productive investment that it saw fit.

Of course, such a policy would be incredibly controversial. A lot of members of pension schemes might be very nervous about being forcibly transferred into the government’s embrace. Employers of well-funded schemes would regard this as expropriation of assets — the separation of pension scheme trusts and company assets would be skated over by those making this argument. They might seek to challenge a nationalisation on human rights grounds. Ultimately, however, even if the government lost such a case, and the precedents of Hungary and Poland are very helpful, ultimately it could simply ignore a finding that it was in breach of human rights law.

Never mind the controversy, the practicalities would be immense. There would be a lot of defined benefit schemes to take on, a lot of administration to sort out, a lot of problems to come out of the woodwork.

Is it a good idea? I leave others to judge. Is it an idea that might appeal to an incoming government at a time when public finances are under unprecedented strain? I think it might be.