Government’s pension pot raid risks leaving millions underfunded
Government plans to allow companies to extract cash from final salary pension schemes have come under fire after fresh analysis found the policy could put millions of retirees’ savings at risk.
The Pension Schemes Bill, introduced last week, creates new rules allowing employers to remove “surplus” cash from defined benefits (DB) pension schemes, which are long-term retirement funds set up to pay former workers a guaranteed income.
But an impact assessment prepared by the Department for Work and Pensions (DWP) civil servants warns unlocking these funds comes with major risks as financial markets and economies change.
The Pension Security Alliance (PSA) have echoed concerns, saying “plans pose a risk to the retirement incomes of millions of members of defined benefit pension schemes.”
“Pension schemes are not a piggy-bank that politicians can dip into or a cash-cow for employers,” the group said.
The group said the DWP’s analysis was “official confirmation that the government’s plans could actually harm members. That can’t be right.”
Nine million people are estimated to be members of DB schemes.
The PSA warned that reforms would allow businesses to divert money meant for pensions into their own books, potentially leaving schemes falling short if conditions were to deteriorate.
DWP analysis said: “Schemes may extract too much surplus. Schemes are currently benefiting from unusually high surpluses due to the macroeconomic environment.
“Any major shocks paired with high surplus extraction levels, could lead to schemes becoming underfunded,” the analysis said.
The DWP’s assessment indicates the extra cash serves as a “financial cushion” in times of economic volatility to protect members if investment returns fall or unexpected liabilities rise.
The PSA said: “The millions of people who are members and beneficiaries of defined benefit pension schemes are the most important stakeholder in this debate, but the Government has neither informed nor consulted them about a policy that its own officials say is a risk to their retirement incomes.
“It is vital that politicians listen to the millions of people who rely on DB pensions schemes for a secure income in later life. It’s wrong to put pensioners’ incomes at risk like this.”
Pension analysis blow to Reeves’ growth agenda
This comes as ministers claim pension pots hold £160bn more than their estimated liabilities.
Chancellor Rachel Reeves had previously touted the surplus as a key pillar of her investment-led economic strategy.
But DWP analysis suggests just around £11bn could be realistically extracted over a decade, as first reported by The Guardian.
This falls drastically short of the sum Reeves had hoped to strum up, dealing a crushing blow to the embattled Chancellor’s growth agenda.
Reeves has laid out plans to shake up UK pensions including several government-backed mega funds to boost pension and wealth investment.
The government introduced a voluntary, non-binding agreement for pension funds, known as the Mansion House Compact, encouraging increased investment in private markets — including infrastructure and venture capital — to support fast-growing UK businesses and the broader economy.
A government spokesperson said: “There are billions of pounds in surplus funding currently in private sector Defined Benefit (DB) pension schemes, with three in four schemes in their strongest funding position in decades.
“Our proposals will unlock funds to boost the economy, remove barriers to growth and ensure working people and businesses are able to benefit from the opportunity these assets bring.”