Good afternoon everyone and welcome to today's webinar making sense of the Chancellor's ambitious plans for DB pension schemes and potential new rules on use of surplus. It was around a year ago now that we ran our last webinar on the DWP 2024 consultation on options for DB pension schemes, where we first find posted the potential changes to the way in which schemes could access surplus. All of this, of course, as part of the previous government's ambitious plans to overhaul the pensions landscape and encourage more productive investment of DB pension scheme assets. This was a radical consultation comprising a bold package of potential measures backed by some strong commitment, and it generated a huge amount of interest and anticipation at the time. But we then had a change of government and things went a little quiet on the DB front. From a pensions perspective, Labor seem primarily focused on DC and LGPS initiative, leaving many DB schemes stuck in a wait and see position. Well, perhaps the wait could soon be over. At the end of last month, the Chancellor announced that this Government will be changing the rules on DB pension scheme surplus use, demonstrating clear intent to unlock trapped DB surplus assets for investment in the wider economy and to fuel economic growth. And with no sense of this government scaling back on previous ambitions, this has the potential to be relevant and significant to pretty much every DB scheme in the UK. So I'm delighted to see so many of you on the call today. My name is Michelle Wright, I'm a partner and head of pension strategy at LCP and I will be chairing today's session. I'm joined by LCP partners to Steve Webb, former Pensions minister, Steve Hodder from our investment practice and David Fares, formerly of the Pensions Regulator. Together over the last few years they have been campaigning for policy change in this area, working closely with government policy makers and other industry influences. So they're all extremely well placed to bring you the latest thinking and insights as to where this might all go. Before we start, I'll talk you through what you can see on the screen in front of you. You should be able to see both the slides and videos of our speakers. You'll also see our contact details, so you can follow up with any of us afterwards, as well as a resources list on the top right corner where you can see some more materials on this topic. You can tailor the screen to suit you by moving the various windows around and changing their sizes. Or at the bottom of the screen, you can switch all of these off and just focus on the slides. Most importantly, you will also find the Q&A box on the top right where you can answer questions as they occur to you. I see some of them coming in already, so thanks very much for that. I'll be keeping an eye on those as we go through and we'll do our best to address as many as we can. If we don't have time to get to them all, we'll make sure to respond to any unanswered questions afterwards. Finally, this webinar is being recorded and will be emailed to you tomorrow to re watch or share. So lots to talk about today, lots of detail of course still to be determined, but nevertheless useful action that pension schemes can and should be taking. Now in terms of what we'll cover, Steve Webb will start with a reminder of how we've got here and give a sense of how likely this is all to happen. Steve Hodder is then going to cover how the changes might impact the running of DB pension schemes and what you can be thinking about now. And then finally, David Fairs will look to the future and cover what Government and TPRTPR might do next and when. There'll be a couple of audience polls as we go through to get your views too. And time to pause the questions after each of our speakers. So with that, I'll hand over to our first Steve of the day to provide a more detailed recap on the journey to date. And Steve, we can't hear you. I don't know if you're on mute. Thanks very much, Michelle. Good afternoon everybody. We thought to try and work out where the government is likely to go next with all of this. It's worth working out where we've come from and how the last governments thinking evolved on this because although we've had the small matter of a general election last summer, there's often a lot of continuity in policy areas, including this one, where to be honest, there's a common focus. The last government and this wants to see more economic growth, wants to see pensions, money used for productive purposes. And so actually looking at the previous consultations and how the government's thinking is developed gives us some clues as to where we might go next. So we thought it worth going back only in fact, July 2023, although that does seem rather a different world where Chancellor Jeremy Hunt had just stood up and given his Mansion House speech. There was the Mansion House Compact, which was all about DC productive finance. But we've been talking to Jeremy Hunt and his colleagues for some while before that and said, well, at the moment Chancellor, most of the money is in DB and it seems a bit unnecessary to write off well over a trillion pounds worth of assets if you're worried about making sure pensions money is well used. So alongside all the Mansion House compact announcements, there was a consultation, a call for evidence from DWP in July 2023, which covered three main areas. The first was how to get DB money used in the government sense productively. So the government was frustrated that DB schemes had moved out of UK equities, for example. But more generally that DB investments had become very boring, very low risk and weren't kind of the kind of things that governments want money invested in. And so they were wondering whether you know is DB is the game run, is the story finished, we move on, or is there any potential for that DB money to be invested with a bit more risk, a bit more return. So that was very much a focus on money within the DB scheme generating economic growth. As you'll see in a moment, that focus has changed. But at the time, the focus was on the money within the scheme. And then they said to themselves, well, if people do generate for greater risk and greater return, generate a surplus, what should be the rules about taking money out? So at what sort of level, for example, should a surplus be regarded as spare money? Would incentives to allow surpluses to be extracted, encourage trustees and sponsors to agree and more risk re risk to some extent their investment strategy? And then could you give the trustees comfort by some enhanced PPF protection? I'll come on to what that might be in a moment. But if the trustees knew that even if everything went horribly wrong, there's APPF standing behind that at a greater level than at present, would that help? So those were two of the key things consulted on. And then the third was a separate but related issue about whether smaller DB schemes in particular could be consolidated using possibly the Pension Protection Fund as a consolidator. Now we won't dwell on that today. Safe to say that although the last government was actually very keen on this, the current 1 isn't talking about it and hasn't really used any language to suggest that that's going to be a priority for them. So we had the July 2023 call for evidence and then we we skip ahead to November. Now in government terms that is very quick because if you launch a consultation in July, everybody goes on holiday in August. So you set a deadline in September for responses. You then spend some time reading them. To actually have made decisions about November is moving pretty quick in government circles, and so these are all verbatim quotes from the government's response in November 2023. First of all, that nothing they'd heard in the preceding months had put them off this basic idea of extracting surplus and using the incentive of extracting surplus to give DB schemes a reason to invest differently to the way they would otherwise have done. Secondly, to be positive about consolidation and specifically about the PPF as a consolidator. Indeed a decision that this will happen. But as I say, that's rather gone on the back burner for now. And then slightly frustratingly for us, the bit we were really interested in was was was pushed into another consultation. So this was a new consultation which wasn't published on the day, which would look at the details of surplus extraction and the viability of a full PPF underpin. And it's worth just pausing to explain what we mean by that. So obviously I am a Trustee, the sponsors interested in extracting some surplus. In my mind that may weaken the funding position of the scheme and therefore I become more worried that my members benefits might not be paid. And the idea of the 100% PPF underpin, as originally proposed, is that sponsors could opt in, could opt to buy extra PPF, cover up to full benefits, and so in that world the sponsors paid some extra PPF levy. The Trustee then knows that if the worst happens and the company goes bust, then not just PPF, traditional PPF levels of compensation would be payable, but full benefits would be payable from the PPF. So that becomes another alternative end game strategy, knowing that there's that backstop. Fair to say that thinking about this has evolved over time. And so there are some versions of this where, for example, the 100% cover would be universal. So you wouldn't be relying on a small number of sponsors opting in. But actually you would say PPF is almost awash with cash, over £10 billion of surplus funds, maybe you could actually pay 100% cover to everybody. And that would be quite a game changer, I think for trustees. So consultation on that which eventually appeared in 2024 in February and do a consultation on the scheme surplus stuff, also on PPF, which I'll park as a consolidator. And they set out three aims of these changes. What is this all for? And the focus still at this point is on the money within DB schemes being moved in the government sense invested it more productively. Secondly, to make it easier to get surplus out. And in particular that focus on scheme rules. You know, the government doesn't want to make a big policy change and then discover that 505,000 unique individual scheme rules mean that in any individual scheme case it might not be possible. So they wanted to look at how they could get by that. And then the third thing I think importantly, bringing trustees into the picture and trying to work out what it would take for a Trustee who's who, as it were, you might be said to have only had one job. You know, if you're a Trustee and you think the only thing you're there for is to get pensions paid, why would you even have a conversation about money going out of the scheme? And so they were trying to look at the reasons why trustees might take that view and what it would take to change that view still consistent with the fiduciary duties of trustees. So that's what they're trying to achieve. 3 belief statements that underpin all of this. First of all, you know the emphasis on safe extraction of surplus from a member security point of view. So they don't just want money taken out and jeopardizing people's pensions. They want to be sure that people's pensions are still pretty safe. Secondly, that this is not a Trustee, a corporate override that trustees are still responsible for, for managing the scheme, managing the funding, complying with the funding code and all of that. And 3rd, quite interestingly, a kind of no strings attached principle. So the argument being conversation between the Trustee and the sponsor, they will decide how the money is used. Government wouldn't in principle say well you can only extract surplus if dot dot, dot if the members get a percentage, if you spend the money on investment, not paying it out in dividends to your shareholders and that kind of thing. So those were the aims. In terms of what was consulted on, there were four areas. So first of all, a statutory override. So this is to do to avoid a lottery of scheme rules. So either they suggested a power that would potentially override scheme rules, for example, a a rule that doesn't allow the sponsor to get any surplus funds or doesn't allow disbursements during the course of the life of the scheme, or alternatively just a power of the scheme to make payments. So they consulted on that second tax. So the headline figure for the tax rate on extracted surplus was reduced in the November Autumn Statement from 35 to 25%. And we'd pressed for this because we felt that sometimes the industry looks at government and the sedate pace government does things and another consultation and might think nothing's happening. So we felt for us it was important that the world could see that the government was serious about this. And changing the tax rate, improving the return from extracted surplus seemed to go to concrete way of doing it. And the government agreed. The third thing they consulted on which probably the most interesting is what is a surplus, Where do you draw the line to make sure that schemes are still going enough money left? And there were four different versions proposed here. So the first was simply to say, look, we draw a line at low dependency. So you know, fairly dull investment strategy gives you a very high probability of the sponsor not being called upon again. And you had a margin, a 5% margin, everything above that is spare. So that's one way of doing it. A second would be to say, let's take low dependency and then a buffer, but the variable buffer depending on things like investment risk. So a boring investment strategy, you could go quite close to 100%, something a bit more fruity, you might have a bit more margin built in. You might be shouting at the screen, well, what about Covenant? And they did talk about that and say, well, how do we work in covenant strength? So might you say, if the covenant is below a certain level, you can't take surplus out? Or might you say, well, the stronger the covenant, the less the buffer that you need? Or do you go very cautious and say, no, money's only really spare above buyout. So we'll fix the stuff about not having a resolution before 2016, which some schemes didn't pass, which might prevent them from taking surplus out. So we'll fix that. But beyond that, you've got to be in buyout surplus. So those are the four things a year ago that they consulted on. And then the other one, as I mentioned, is the 100% PPF underpin. Now it's important to stress the consultation was on the basis of an opt in regime and the worry within government was that not many sponsors would take this up. And if not many people did it and it had to you know, have enough money just in case one of them went to the wall. The the modelling suggested AA60 basis point levy, so .6% of scheme assets per year levy. And everyone said in response to the consultation, well, that's a non starter. So I think our thinking certainly has moved on. This is something we've proposed is that actually some sort of either universal PPF cover 100% or enhanced compared with the current level of cover. So I think there's political pressure to look at pre 97 indexation. So if they enhance 397 annexation, say 2 1/2 percent capped, maybe they got rid of the 10% haircut when members are under pension age. If they did all of that, you'd be getting fairly close. So you wouldn't have reached scheme benefits because of all the caps and so on, but you wouldn't be far off. And so would enhanced PPF cover or 100% PPF cover provide the incentive that was needed? Well, it all went a bit quiet. This was a year ago, a February 2024 consultation, the small matter of an election, and yet nothing really seemed to be happening until January 2025. S literally last month, almost out of the blue, we got this. The Chancellor, the Prime Minister saying changes to pension rules will allow trapped surplus funds to be invested in the wider economy. Now crucial first point here, you're allowing the trapped surplus funds to be invested. How? By getting them out of the pension scheme. So the government is now fundamentally talking about, yes, they they would like re risking within the DB scheme, but fundamentally this is about getting money that's not doing much in their view into the hands of quotes corporate Britain, and of course, lots of sponsors aren't corporate Britain, but to reveal over that. So that then that will boost the economy, that will give the employer money to spend on wages or investment or higher DC or something else. So, and, and the other crucial point about if you sort of criminalize these words, if the parliamentary Secretary of State from the paper clips said this, you wouldn't care. But these words have been put in the mouth of the Prime Minister and the Chancellor. And if the government says we'll and puts those words in the mouth of the Prime Minister and the Chancellor, you can be pretty sure this is going to happen. So some people say, oh, you know, we've it's all talk. We've heard it before. This is a pretty clear commitment to action. The second thing is restriction will be lifted on how well funded DB funds performing well will be able to invest their surplus funds and again invest I think is code here. They don't invest their surplus funds within the scheme necessarily. One way of investing them in the business is get the money out and invested in the business directly. So again, this shifting emphasis to using the money productive before the sponsor and the wider economy and taxing it on the way as you go, rather than expecting DB schemes to do too much re risking. And thirdly, again, crucial language where trustees agree. So this is not a company override. This is an agreement between trustees and sponsors giving employers choice again. So there's no sort of indication of strings attached. And there could be upside for the members, so discretionary benefits or whatever and an upside for the sponsor, but it's an agreement between the Trustee and the corporate. And the final crucial thing is they have this interesting sentence. Nearly 3/4 of schemes are in surplus worth £160 billion. Now when we heard this, we all looked at one another and said, well, what's the question to which 160 billion is the answer? And our colleague David Wrigley and others looked at the numbers which TPR published the same week. And TPR analyzed the funding position of schemes on a buyout basis and on a low dependency basis, and this is what they came up with, they reckon. But if you looked at just the schemes who are in surplus on a buyout basis and added up the surpluses of those schemes, you get 97 billion of surplus, just under 2 1/2 thousand schemes. But the government didn't use that number. The government used the second set of numbers here, the low dependency surplus. So if you add up all the schemes in surplus on a low dependency basis and take their surpluses together, you get 163 billion and you're talking 3600 odd schemes. So crucially, it wasn't an accident that they picked the 160 billion number. They were telling us something. They were telling us that they plan in what's forthcoming. And David Fairs will say a bit more about what we think's coming down the track. They plan to draw the line somewhere around low dependency. We don't know if it'd be exactly that plus a small buffer, but at that sort of level. And of course, the impact of that is twofold. First of all, well over 1000 more schemes coming to scope. So when Michelle said at the start, you know, everybody needs to have a look at this, you know, we even today 3/4 of schemes are in surplus on this measure, potentially more in future. So this is, this is not a niche issue. This is something for all schemes pretty much to consider. And the amount of surplus in play is much bigger. I mean, so even the buyout surplus schemes can potentially if they want to go down to low dependency or something like that. And suddenly there's a lot more to play for. So what do we conclude from all of this? Well, first of all, that initially it looked as though the government was so focused on DC because it's the future, and LGPS because it's big and the government sort of controlled it, that they put DB on the back burner. But actually, I think what's happened is they realized that the DC structural market changes could take five years. So post 2030 of their plans that the LGPS stuff, it's been going for 10 years. You know, LGPS pooling was first announced 10 years ago and it's, it's a slow burn. And if you're a government that is now 4 and a bit years from an election, you know, we're already, you know, well into the first year you're in a hurry. And DB seems to be potentially where the money is. And as I say on that second bullet point there, you know, if you want to say to the OBR, we're doing something now and in three years time, there'll be some tax on extracted surplus, there may be some growth, you've got to move pretty quickly. And DB seems to be the way they will do that. Definitive language, as I've said, not we may or so on, we, we will now. And and the fact they chose that 160 billion number was not an accident. It's telling us that they are aiming high with all of this. Fortunately, the fact we've had that sort of 18 months of painstaking consultation means that we should in principle move to action much sooner. Now it is never the case that there isn't going to be another consultation. There's always another consultation, but but the decision is in principle have been made and a lot of the consultation has already been done. So that will speed things up. And then finally, Michelle, the fact that we got a pension schemes bill coming soon, which David will talk about in a moment or two means that literally in the coming 6 to 8 weeks, if not sooner, they are making these decisions because of the legislative timetable. So, you know, when some people looked at what was said in January, a few people said, oh, there's not much here. A bit of fiddling around with whether we passed a resolution before 2016, but not much else. It's pretty clear from all of this that something big is coming. Someone in a conversation I had the other day referred to action on DB surpluses as nailed on, you know, so this sense that it's coming, it's big and everyone should be thinking about it. And with that, Michelle, I'll hand back to you. Great. Thanks, Steve. So very clear steer that something big is going to be happening. Just time for probably one question to pick up before we hand over to Steve. And it's around what we mean by kind of investing productively for growth. You talked about pension scheme investment, you talked about releasing surplus for investment in UK business. Where do members fit into all of this? Members get higher benefits, higher pensions, they have more money to spend in the real economy. Is that an angle that the government is is conscious of and thinking about as well? Yes, I think, I think it's almost all of the above. So I think the government still vaguely hopes that there will be an element of re risking. And so if, if schemes are willing to put some risk back on the table because there is an upside, one of the problems with taking investment risk at the moment is this, there's no upside. If you're well funded, why do you want to be really, really well funded? Whereas if you can see a route to extracting surplus in live running, you know, year by year while the pension scheme is actually still in operation, suddenly you might say, well, hang on, we can cream off the surplus we've built up so far, but we can build some new surplus by putting a bit of investment risk on the table. So from, from the sponsors point of view, they may be willing to live with more investment risk. The Trustee, provided that there is comfort for them, whether it's enhanced PPF cover or some other route may be willing to have that conversation, particularly if there's an upside for discretionary benefits for the members. So, so there is, you know, one should be wary of politicians or ex politicians talking about kind of win win, but you know, there is a chance for everyone to come out of this well as long as the right safeguards are in place. Great. And that's probably a perfect segue on to Steve Hodder then to talk about what pension schemes should be thinking about now and how you can think about this through the lenses of all of your different stakeholders. Brilliant. Thanks Michelle, and thanks Steve for the background there. In terms of where we think the government decision making is, as Michelle says, I'm now going to comment on what we think this might mean for schemes, but but first touching on what exactly we think the government might be looking at doing because that will clearly inform exactly how it impacts different schemes. So the broad status as we understand it, as Steve has said, is we've had a strong and ambitious decision made by those in numbers 10 and 11. And our understanding is the policy makers are now working through the list of exactly how they can deliver on that. They have a pretty good shopping list from the consultations over the past couple of years and I think they're working through the trade-offs of exactly what can be done, what can be done relatively quickly, what's going to have the impact that we need. So I've put all of that in a policy option table. I've scaled it in order of impact and effectively just talk through quickly now what might be coming, what I think the government needs to be looking at in order to deliver on that huge scale of ambition. So the first change already been referenced is fixing this section 251 issue. I imagine some on the call would have never heard of this, some might be more familiar than they wished. But broadly the point here is that there was a legal point in 2016 where even schemes that could previously return a surplus or do something with it, if they didn't pass a new deed in time, they would lose that ability. So I think fixing that rules lottery of whether we managed to do something or not almost a decade ago shouldn't determine what we can now agree between company and Trustee is a fairly good, sensible step. Almost certain I think this is going to happen. It was the one thing that was explicitly referenced in the government press release. But I think the crucial point that we've stressed to policymakers is please don't think doing that alone is going to cause 160 billion of surplus to be flown out. Plenty of schemes don't have that issue. They're not currently releasing surplus on mass, so don't please believe that this on its own is is going to achieve what the Chancellor has asked you. The second on the list is a statutory override to scheme rules. Now, as Steve said, we think it's highly unlikely this will be statutory override to allow companies to take out whatever they wish. It's very clearly worded to be a trusty decision, but I think the potential benefit here is twofold. Firstly, some scheme rules might say a certain thing happens to surpluses, and it may well be that trustees and companies want to agree. Now something else that's either going to take some time for every single scheme to work through that or in some cases there's actually a rule that says something that happens to surpluses and then the next rule says, and see above, rule can never be changed. So effectively can we unlock some of that. So I think it's probably pretty likely that we're going to see a statutory override to allow trustees and companies to now agree what they think is appropriate in the circumstances they've now got to, not what the rules said when they were drafted perhaps 50 years ago. The third option on the list, and I think we're increasing in impact now, is the TPR providing some really good guidance to trustees. Perhaps it becomes known as a surplus code to sit alongside the funding code as to exactly when trustees should use this new flexibility. On the changes we've added up so far, all we've really given trustees is the power to say, yes, let's pay some surplus back to the sponsor. And so we've already had a number of questions coming in and saying, well, as a Trustee, why on earth would I do that? So some clear guidance from the TPR saying when this type of thing might be appropriate, what trustees should think about before doing it, what else perhaps they should seek in terms of protection, I think would be really powerful to help sort of set the ground rules here. So those three things I think are pretty likely. I think doing all those three things will impact what some schemes choose to do. I certainly don't think it will achieve everything. So now we get on to the harder things. We've talked a bit about it already, but exactly when can you allow surpluses out? Clearly, the lower you set that bar, the more money might come out sooner, which is possibly what the Chancellor's looking for. But it also makes it more attractive for schemes to even consider doing this. If you set the bar too high, schemes will go through buyout funding level and beyond get to the point where maybe that's what they want to start doing. Whereas actually, if you set the bar a bit lower, conversation starts sooner as to what the real purpose of the scheme might become over the 5-10 years ahead. Of course, there's no guarantee that if you set the level at low dependency, any scheme will agree that's appropriate. I think it's really important to, again, remember the trustees still have the keys here. It probably won't be appropriate for lots of trustees to release surplus all the way down to that level, but if surplus release is flexible in legislation down to that level for the really strong schemes where it may well make sense, at least that's an option, then we get on to a really big one. I should start by saying I'm not a lawyer and I think we've got some on the call, so please chip in if I if I get any of this wrong. But there's a really important point about fiduciary duty here, Trustee duty. What tests are trustees trying to work through before deciding what to do here under? I think it's section 37 of the Pen One Pensions Act currently. If trustees want to release surplus from an ongoing scheme it needs to be about buyout, but it also needs to be determined to be in members interest to do so. That's a pretty high hurdle. Even if the scheme is super well funded, say 150% funded on buyout, For a Trustee to say that paying money out of the scheme that the members are a member of is in their interests. It's just a bit odd and possibly hard for some trustees to square. So there's thinking in the industry that maybe that test should be softened or adapted to not materially averse to members, IE if we're happy that we've gone through all the right loops, that the right level of security still exists, then it's it's OK for trustees to, to do that sort of thing. And then finally on this list, I've put it at the top of the pyramid of impact, new member protection provided centrally, for example, the PPF, as Steve has discussed, providing full cover of scheme benefits. So this is not an easy choice. This is not an easy action. And and we've spent lots of time talking about implications like moral hazard. If you provide that full cover, does everyone go and invest super aggressively? Don't think that's likely. But clearly all of those implications need thinking through. But I think the potential power of that type of option is it would make everyone sit up and listen. It's the shock and awe option of we've now changed the rules. Members are protected through the PPF to their full benefits. That I think causes every scheme to sit up and, and, and take a look at what they're trying to achieve. So if we're trying to get to the top of the pyramid and get to that 160 billion type of scale of impact, those might be the lists, the options on on the list for the government to be looking at. So depending on what, if any of that happens, we think obviously at least a few of those things are happening and possibly some of the stronger ones are coming. What might this mean for those running schemes? I think it's potentially pretty wide reaching in terms of what you need to be thinking about. I'll start on the top left. So scheme funding, clearly we've got the new funding code. Lots of schemes are working through or planning to work through the 1st valuation under that and exactly what types of funding bases they want to set. We'll a new line in the sand from the government about exactly where surplus can be extracted, impact some of those discussions possibly in terms of what the right level of prudent funding is and possibly we might see a reassessment of exactly what technical provision funding bases might need to be. I think investment strategy and journey planning sort of go together. This may well create a new option that some schemes want to pursue and might change their ultimate where they're trying to get to plan or, or when they try and get to some sort of consolidation stage. So that's going to impact funding pace, it's going to impact contingent security, all of that type of stuff. And also investment strategy, as I think Steve's already mentioned, if you've got a new power to release some surplus assets, well, maybe you start investing a bit differently so that both the sponsor members can benefit sooner from some extra return, potentially discretionary benefits just mentioned members benefiting some schemes. This is a very live question, has been the case for for many years. Others may not come up very often. But part of the whole thinking here is that members are very well funded, strongly supported schemes could potentially benefit further from that, especially those without high inflation matching after a period where they probably feel quite a bit poorer than they did before. And then a couple of things from the sponsor perspective, Clearly for some sponsors, pensions accounting or the accounting of a pension scheme within their company accounts is very important and the potential to access a surplus changes whether they can recognize that as a balance sheet asset or not. So that's going to be very significant for some. And then finally I'll put M&A on here. Are we probably, well we probably lived through a period of of lots of M and A transactions putting a big Red Cross next to a company that has ADB pension scheme, it's cost, it's risk. We we all know how that story goes. Whereas are we now transitioning into a world where a really well funded scheme that can pay out from itself once it continues to grow more surplus becomes viewed as an asset. And I'm going to talk a little bit more next in terms of how that can be assessed. But I think the really key question for everyone involved in running schemes is will these new flexibilities change our strategic direction? So I'll now talk about some analysis that we've started doing with clients in terms of helping them understand what the answer to that question might be. So relatively busy chart, but I'll step through the headlines quickly. So this is a billion # scheme. It's fully funded on buyout and it's invested targeting gilts plus one and a bit investment returns. That's pretty common or a pretty typical position for lots of schemes to be in. So we've started running analysis that says, OK, let's look at if we can release surplus, what the level of cash flow out or potentially back into the scheme might be over the years ahead. So this is suggesting surplus paid out above buyout. Of course, in practice it may be the rules allow more to be paid out, or it may be those running the scheme might decide to be a bit more cautious and leave some buffering. But just as a starter for 10. And what you can see here is that the scheme starts by generating meaningful extra surplus every year, 9:50 to 20 to 30,000,000 lbs. But as it matures, as it gets older, as the buyout price gets cheaper for members retiring, actually that rate of extra surplus starts to tail off by around 2040. Clearly that red line in the middle, those numbers I've just referenced are central scenarios and there's a pretty wide range here. Even with a relatively safe investment strategy. You can see in the early years, the range is more to the upside because we are saying in this model that you start paying contributions again if you fall back below low dependency funding. And this scheme starts with a small buffer above that. It's pretty unlikely in the first few years that you drip back into paying contributions, but they become a possibility later down the line after you've taken surplus out and perhaps the scenarios evolve in in the wrong direction. So a few things to note from here is obviously there's, there's potential meaningful surplus, but it does tail off relatively quickly. And I think those running schemes should be looking at pictures like this and, and having conversations about how do we feel about this balance of risk and reward versus an alternative option of just saying, Nope, I don't like that game. I don't want any possibility of any future cash flows being paid in at any point in the future. So then we started thinking, OK, well, if I'm looking at this through a sort of corporate finance lens, that profile of cash flows, if I'm the finance director that that might look similar to any other project I do as a business. I've got potential for for income. I've got variability around that. How might I value that set of cash flows from a sort of discounted net present value point of view? And that relatively simple calculation suggests that the value might be about 160 million for a scheme of that size, but clearly with a big range. So this model suggests anywhere between 50 million to 300 as a potential range of value of that scheme. There's about a 1% chance that the value is negative under this modelling, with a sort of fairly strong skew towards a positive value. Now that's the total value. If I'm thinking from the sponsor point of view, I'm probably expecting in the vast majority of cases some of that value to be shared with members in some way. And this chart suggests by different levels of share, how might the value change? So we've got the 160 on the left. If you share 5050, it drops to 70 million. If you start sharing much higher proportions with members, it drops to maybe the level where from a sponsor's point of view, I'm no longer that happy about continuing to run this risk. A couple of other variables before I wrap up. Firstly is investment strategy. So that was all done on a gilts plus one and a quarter strategy. Steve mentioned earlier the idea that some of this might be, well, if this is now my game and I can really surplus, I might start investing differently. Adding half a percent of investment return on the left hand side increases the value from 160 to 240, but of course it does increase the range and it makes some of those bad scenarios more likely. Cutting investment return to Gil's plus 3/4, which might be a strategy some are using, actually reduces the value which you'd expect, but it also increases the chance of worst scenarios. So there's a real conversation to be had there about what the right level of investment return is. And then finally, scheme size. Really important factor. Clearly for very small schemes, none of this is going to add up because the running cost of the scheme are just disproportionate, so there isn't going to be any value there. For very large schemes, the value will be much higher. But the learnings from this chart suggests that the 5 billion scheme in pink obviously has much bigger potential for surplus and it takes a bit longer to tail off. The scheme in yellow is the one we've looked at, 1 billion, half, 1,100,000,000, those sorts of levels. There is still some value, but it quite quickly sort of gets to the level where it may not really be worth it any longer. And finally, just to highlight, there are lots of caveats to all of this. Clearly, no one can make big important strategic decisions just based on what one model says and what colorful chart says. I think it's really important that everyone running schemes first has a refresh of what really is the point here, what are we all trying to achieve from a member perspective, from a sponsor perspective, and gets really firm legal advice on exactly what is possible, what the situation is. The 2nd row one here is about risk. Now we've obviously thought hard about our modeling and we've thought about different correlations, whatever else, it includes longevity, risk, other stuff. But we all know from history you're never going to capture everything and even the cleverest models. So how do we all feel about the chance that we make a decision, we pursue a strategy, but things then happened that we didn't know about or we hadn't thought about and it doesn't transpire as well as we thought? And then final row one here is a more practical aspect. So there may well be some situations where even if the modeling or the strategy option looks really, really compelling, those perhaps running the scheme, maybe from the company side, just there isn't the governance budget all time. This isn't what we want to be focusing on. It's not of interest to us and I've mentioned both already, but tax and accounting are things that will be really important in some circumstances and completely change what the right answer is. So I'll hand back to Michelle there and I think we're heading into our first polls and then very keen to take any questions. I've seen lots of coming through. Great. Thanks, Steve. Yeah, lots of questions coming through and lots in relation to Trustee and member perspective as well. So probably worth just emphasizing that although a lot of the analysis you showed on the previous slides looking at potential upside from from a sponsor perspective, lots of additional analysis that can be done looking at this through a member lens as well. So things like looking at the, the likelihood of members getting their benefits paid in full, looking at the different forms in which benefit uplift might be awarded, looking at how sharing would affect the long term projection of your your funding target on, on a Trustee's agreed funding basis. So lots of analysis that can be done. And I think all of that is really helpful for framing Trustee decision making, how they're going to interact with their sponsor and also thinking about what safeguards they might want to put in place before agreeing to, to any proposal to, to distribute surplus. Before we go into the poll, just pick up, there's a number of questions on on a similar theme. So just to, to pick that up. And, and it follows what we've just been talking about, which is can understand why the proposals are very compelling from a sponsor perspective, but what is the incentive for the trustees? Why would they take this additional risk? And some of the examples that have been picked up are ones where, you know, particularly where there is an uncertain or cyclical covenant, particularly where maybe the scheme rules already give trustees power to to. Distribute surplus to to to members. Yeah, absolutely. So I think the covenant point is, is vitally important and that directly should flow into when it's right to release a surplus. When, when do you genuinely have a surplus? If you've got a super strong covenant, you might say as soon as I'm fully funded on a low dependency type measure, anything above that surplus because we might dip back down, but we've got the strong covenant. For those with a weaker covenant or more risk that it might become weak, the bar has to be higher. So I think how I see it working in my mind is every set of trustees has as a negotiation over where's the right bar for us. The second thing to add on covenant is protection. So cases we worked on recently where we've agreed for sponsors to start using surpluses for paying DC contributions, that sort of thing. It's pretty common for the trustees to seek some additional of security, whether that's parent guarantees, whether that's things like surety bonds, extra covenant support so that the Trustee can say apply the five year test. Am I going to look silly for having allowed this to happen? Actually, I've got something in this deal that makes me pretty comfortable. And there's sort of broader point on, on, on why do this at all as trustees, is this really what we're trying to achieve? And I think some of it is just around that potential share of upside with members. If we can get to a point where we feel like our members are as protected under this type of model versus what else can be done maybe. Well, it is in, in, in members interest to agree something with a sponsor. And then the point on scheme rules, scheme rules that are currently very friendly to trustees. Yes, that puts trustees in a great start point for that negotiation as to as to what might happen from here. So you might expect a higher member share in that scenario, Yeah. And and certainly lots of differing views and very strong views from the discussions that I've been having with with pension schemes on this to date. And we can see that coming through in the theme and some of the Q&A. Good time to pause to do our first poll, which is to what extent do you think the use of surplus proposals will affect your scheme strategy And the options are this could be a very significant development for us potentially, but too early to say limited impact. We're already planning some form of surplus share or distribution or limited impact. We have no intention of sharing or distributing surplus. So just pause for a couple of seconds while those responses come in. Perhaps on do not just ask you a follow on question, Steve, related to the previous discussion, which is in most cases, do you think this will be a case of trustees responding to proposals from a sponsor or can you envisage circumstances where the trustees are taking the initiative on this? I mean, so far these types of strategies, it's been more common to be sponsor LED. So sponsor looks at the scheme and has ideas of what it wants to do and trustees have to respond to that. Certain cases, trustees may take the front foot, especially if they have strong powers and what happens to surpluses, and maybe start feeling like they should be investing differently. But if nothing else, trustees should maybe be starting to think we're probably going to get a question on this from the sponsor in due course. Maybe we need to get our ducks in a row in terms of what we might think about these options. Yeah, I think that's absolutely right. Still some responses coming through, but in the interest of time, I'll click through to the results now. So a mix, so some interesting. You're already planning some form of step to share overwhelming majority saying potentially too early to say, which isn't a surprise. We know that there's lots of detail still to be worked through. And then finally the next poll before we move on to to David Fares, which is which of the following potential changes do you think will have the biggest impact on pension scheme behavior? And you can take all that would apply here. So the statutory rules override introduction of guidance from TPR permitting surplus extraction above low dependency as opposed to a more prudent buyout basis, change in Trustee legal duty or member protection such as the enhanced PPF underpin. And we did have some questions coming through on the PTF underpin which whilst we're waiting for responses to come through, I can pick up now. And this is to what extent do we think this would be a universal enhancement as opposed to sort of opt in or potentially applying only where there's a EG a statutory override? And what impact do we think this will have on future levies and in particular PPF ability to reduce levies to nil? And I don't know whether which of the Steve's want to pick that up. Do you want me to pick up on that, Michelle that? Would be great. Yeah. So I think, if you'll pardon the phrase, keep it simple, stupid. You know, the idea that you'd say, well, this level of cover, but not if the rules allow this or this resolution has been passed. It's very hard to see that that would work, I think. And as a, as a politician, you want to be able to say we've just underpinned the pensions of 10 million people. You don't want to say, oh, but it's 3.2 million because this scheme has this rule and all that. I think they wanted to be big and bold and impactful In terms of the levy. Clearly there is a, there is a levy impact of all of this making it universal makes it kind of much more economic than hoping that a small number of people will opt in. So we think the levy impact could be relatively modest. But certainly if PPF knew that this was coming down the track, then the possibility of going to 0 for the year that we're about to go into I think would would diminish because they would be a bit to set it down to 0 and then bring it back again. So they might, I mean, I don't know they'd have to make that decision, but I suspect that we would have a smaller fall for 2526 levy paid. But but but you know, given that they're sitting on well over 10 billion of spare assets, it's not like they would need a huge levy. I mean, a lot of PPS money does not come from the levy, comes from the return on the assets they've taken in. So, so we think it's manageable without huge hike in the levy. Great. Thank you, Steve. And looking at the results here, actually pretty, pretty even split across the different ones, which I suspect in practice means that people will be relying on a number of these protections coming into force in order to change behavior. But certainly lots of detail that will need to be worked through. And so probably a good time to hand over to our final speaker, David, to talk about where we go from here. Thank you, Michelle. I did say to Steve if he, if he said the TPR during his presentation, I would ask him to put £10 in the in the charity jar. So by my reckoning he's £20 down now. So we'll so, so Steve has covered the journey of how we got here and the other Steve has highlighted some of the items which are important really to understand the policy intent. But as Steve said, we don't know all the detail. And Steve's also said, what does this mean for individual schemes? And he's given us some illustrative numbers. But who decides what's going to happen and and when? So Steve has said this was announced by the Prime Minister and the Chancellor. But you might be asking where does the pensions minister fit into this? Well, in this diagram I've tried to set out my view of the hierarchy of decision makers. The closer you are to the top of the page, the that the, the more important and influential you are. But Mr. Steve said the decision on whether to do this seems to have already been decided. It's really a question of who's going to decide on the detail. Well, spoiler alert, it seems pretty clear to me that it's going to be the chancellor who will ultimately decide on key aspects of that. And and that's I think particularly because of the importance to this whole policy area to the growth agenda, but feeding into that decision, you'll have a lot of thinking being done within DWP, also within Treasury. But a lot of the analysis is going to be done by the Pensions Regulator. It's TPR that's got the data and they've also got the resources to be able to do this kind of analysis. TPR will be pressing hard for surplus extraction to be not at low dependency, but low dependency plus a margin. When the low dependency basis was developed for the new code, it was designed to give a probability of about 9596% of members would get full benefits. I think the regulator will push for a margin over that to get the probability up to 9899%. I think that's where TPR will feel comfortable. But I saw on the slide, actually the PPF will also have a view and be providing input because surplus extraction changes the nature of the risk that they're underwriting. And so it's very easy to see that they might also be in that camp with the regulator of saying low dependency plus a margin too. On the other hand, you could see that the Chancellor and Treasury might well want the lowest hurdle for surplus release to get the maximum amount of money flowing into the economy and to also maximize tax receipts. And that probably means every scheme being able to receive to release surplus, every scheme. But as Steve was highlighting, there are a lot of details in terms of how the surplus gets extracted and who gets to say in that decision. It kind of really begs the question of our sponsors going to get an automatic right to extract surplus. Do you give the sponsor the right but put in some safeguards as Steve was saying? Do you make that conditional on covenant or some other area, or do you just let the sponsor and trustees negotiate against some minimum level? And you can see, I think, that the more this becomes a negotiation rather than an automatic right, the longer it's going to take for that money to flow to the Exchequer, to flow into the economy. So there's going to be a real balance here. Ultimately, I think where we land on these points will be a political decision and one absolutely made by the Chancellor. So there's a lot of policy detail to be sorted, a lot of analysis being done on the various options, and also a lot of work trying to work out what the unintended consequences of this policy might be. So for example, if you allow a surplus above low dependency to be released, what happens to the investment strategy within the scheme after that? Do the trustees then go very conservative to protect their position? And that's clearly not what the chancellor is hoping for. But how do you incentivize trustees not to do that? You have to think through the interactions with other pensions policy as well. Pensions bill will also introduce Superfund authorization. And if you allow surplus extraction, what does that do for the gateway test for Superfunds? Almost makes it redundant. So a lot of interaction with other policy areas to be thought through too. Which brings me to parliamentary process and probably a big question. How much is going to be in primary legislation, How much in secondary legislation? I just mentioned Superfund authorization, but within the pensions bill, we're also expecting things on small parts, value for money and the Steve was highlighting DC consolidation. So that's a really lot of big policy issues to be thought through. And given the size of policy issues to be put into the bill, the temptation for government might be to put as little in primary as possible and put all the detail in the secondary. That way you've got a bit more time to think through some of these difficult policy areas. But the challenge is you don't gain huge amounts of time because particularly when the Bill gets to the Lords, they like to see some of the detail behind the headlines. They want to know what secondary regulation is going to say before agreeing the primary regulation. So you've got to do a lot of that detailed thinking as the bill gets to the Lords or before the bill gets to the Lords. And for surplus extraction, I suspect the primary legislation, maybe the framework for surplus release, maybe that legislation is already drafted or pretty much there. But there's a lot of detailed thinking to do. And I think the whether it's low dependency, low dependency plus a margin, all that we're likely to see in secondary legislation as Steve was saying earlier. So Steve was saying earlier, it's possible we there might be another consultation, But on the premise that a lot of being consulted on already, I think Steve's probably right. They'll try and minimize that and proceed as quickly as possible. What does that mean for the regulator? Well, the regulator's already been doing quite a lot of analysis as Steve referred to. They'll be supporting DWP and Treasury on policy thinking through some of those unintended consequences that might arise from this policy. And if there is some discretion on surplus extraction, I think no doubt they'll have to be a code and guidance coming from the regulator. But likely given the time pressures that we're facing here, they might well be urged to do that code, that guidance alongside development of regulations. Ideally, what the regulator likes to see is finalize regulations, then they develop, develop a code and guidance. But I think those two things might be developed hand in hand. So what does that mean overall in terms of time scales? Well, it's important to look at the end of this diagram critically. There will be an election in 2029 or before, so the government needs the benefit from this policy change to flow through by 2028 at the latest. So that actually he's got some impact before the 2029 election. So what what happens on the timeline up to that? Well, actually in the very near future, it's possible while the pensions minister, I think is lined up to speak at the PLSA conference, might hear a little bit more at, at the conference if you're going along to hear that. And of course, we might hear more from the chancellor at the Spring statement. We are expecting the pensions bill to be in June and that does mean in terms of getting everything signed off that you pretty got pretty much got to have got all the detailed legislation nailed by the end of March, April for it to fit into the pensions Bill. So huge amounts of work to be done, huge number of of policy areas to be decided. But because of the length of the parliamentary process, if the government's going to get the benefits flowing by 2028, really has got to motor in terms of getting those things to read and actually getting the bill through the parliamentary process. The more detailed that's withheld from the primary legislation, the more likely it is that legislation might end up in ping pong and being delayed getting through that process. So kind of interesting challenge for the government to have. Back to you, Michelle. Thanks, David. And I think really helpful to get a sense of when these changes might be coming into effect. And as you say, lots and lots to be worked through over the coming weeks and months and we've had loads and loads of questions coming through. So thank you for that. We probably got time for a couple of them before we wrap up. David, you talked about TPR providing guidance to to trustees. What about conflicts of interest? We've had a question come up on that. There's inevitably a number of inherent conflicts of interest for various parties involved in in making these decisions. How will TPR be thinking about that and will they be providing any guidance or or commentary on on how to manage those to ensure members interests are adequately protected? Yeah, I mean, it's fact of life. There are conflicts in in the pensions world. You can't get rid of them entirely and it's question of how you deal with them. So you could see, let's take an extreme example. The finance director is also a Trustee and clearly it's got a conflict of sitting on both sides of that fence. That's obviously not going to be right, but there are some conflicts. There is a conflict anyway in terms of professional trustees being appointed by the employer and then making decisions on this. So I think, you know, that's an area that the regulator is already flagged as a potential conflict of interest. I, I think this is, this is not new. It just kind of adds to that pressure on the regulator to to say more around conflicts of interest with trustees, professional trustees, people who might sit on both sides of the fence. Great, thank. Thank you. A few other sort of incentives that we haven't talked about today that have been talked about previously. So what one was around removing tax consequences for one off payments to members. And there's also been a lot of debate in the the Q&A around it's this ongoing debate around to what extent Trustee should be prioritizing looking after members accrued rights versus having any aspiration to increase benefits beyond that. And an interesting question there around interaction with the Pension Schemes Act 2021 and any criminal sanctions for risking accrued benefits. I don't know whether that's something that's been thought about and discussed, David as well. Yeah, I must admit, when I was at the regulator I thought this is a brilliant piece of legislation. Now I've moved on to the advisor side and it might be subject to, perhaps I'm less keen on it, but there are three steps to that. You have to do harm to people's benefits. You have to know that you were, you were doing it and you have to not have a reasonable excuse. I, I think, you know, as you go through the process, it does mean that you've got to think through all the options. You've got to document the options, you document your analysis and document the final decision. I think if you're a Trustee and you go through that process, you know you will not be subject to criminal sanctions. This whole legislation is for people who deliberately do bad things, trustees who might actually make in hindsight what what was the wrong decision and not going to be subject to the these criminal sanctions. But you know, it is there as a discretionary penalty if you like, for the regulators to seize if they think something untoward doing. But I think if you do it properly, if you have proper conflict management, then I think you'll be absolutely fine. Very clear. Thank you. So I'm conscious that we're nearly at time. So I think we have to leave it there. Thank you to everyone for all of the questions that have been coming through. Apologies that we haven't been able to get to all of them, but we will follow up with them afterwards. It seems clear to me from everything we've heard today that changes will be happening. We'll wait to see the detail around quite how significant and far reaching they will ultimately be. We know and we saw from the polls and from the questions coming that views on this vary considerably. Many sponsors will be seeing this as a real source of potential value for their business. Other sponsors and some trustees feeling much more agnostic to or cautious about the proposals. But I think that range and strength of views that we're seeing really highlights the need to understand what the potential impact is of the changes on your pension scheme risk and outcomes and therefore how all of your pension scheme stakeholders might be thinking about this. That brings us to the end of our webinar. I hope it's been informative. Shortly after the webinar ends, the screen will prompt you to complete a feedback survey. Please do complete this. The feedback is absolutely invaluable to us as we develop content for future webinars. And please do reach out to any of us if you'd like to discuss any of this in the context of your scheme specific circumstances further. Thanks very much. _1742565587294