Mercer’s response to the UK Government’s call for evidence in relation to options for Defined Benefit pension schemes 

In its drive to deliver greater economic growth the UK Government is interested in ideas that encourage investment by pension schemes into UK “productive assets” (e.g. UK private equity, UK infrastructure and UK listed companies) and has asked pension schemes to provide evidence to help its understanding.  

Two main strands of the call for evidence centre around encouraging trustees and sponsors to invest in productive assets, whether by incentivising them or addressing current disincentives, and encouraging consolidation of DB schemes. 

This article provides a summary of Mercer’s response to the call for evidence in relation to defined benefit pension funds.  Mercer has also responded to separate requests from the Government in relation to defined contribution schemes and local authority government pension schemes which we are responding to separately.


  • Mercer believes that there are opportunities to make changes that would benefit the UK economy by increasing investment in productive assets, but caution is needed as not all types of productive investment will be suitable for the guaranteed liabilities of a DB scheme. Some changes could also drive better outcomes for pension savers.
  • We believe there is a place for productive assets in balanced portfolios, and more so when investing at scale. However it is essential to clarify what is meant by the umbrella term ‘productive investment’, and we would encourage Government to avoid assuming that all productive investment will be suitable for DB schemes and necessarily drive better outcomes.
  • ‘Productive investments’ include equity-type higher risk investments and long dated illiquid credit-type investments that are unlikely to be suited to matching DB liabilities, the latter particularly where schemes need liquidity to protect against an insolvency or wind-up scenario or in preparation for a transfer of risk to an insurer or consolidator. However, productive assets can also include lower risk, long-dated fixed interest bond-type investments, which could be a good match for the guaranteed liabilities of an ongoing DB scheme and benefit the UK economy. Long dated credit or infrastructure-type investments are illiquid but may still be suitable for an ongoing scheme with lower liquidity needs.
  • We also note that DB schemes already hold a large proportion of the UK gilt market, which itself supports the UK economy.
  • We are therefore encouraging the Government to consider how to expand the productive investment opportunities that would be attractive to UK DB schemes and be a good match for their guaranteed benefits. This could include long-dated infrastructure bonds, for example.
  • Given the current strong funding positions of many DB schemes, Mercer is encouraging the Government to make legislative and regulatory changes to make it easier for sponsors to access surpluses arising in ongoing schemes, whilst ensuring that this does not adversely impact the security of members’ benefits. This would address sponsors’ concerns about overfunding and outperformance leading to ‘trapped’ surpluses. Changes could include:

    - Legislation to permit trustees and sponsors to agree how surplus should be owned and distributed in an ongoing scheme.

    - Reducing the penal tax treatment on returning surplus to the employer. This could then be invested in the sponsor’s business to drive growth.

    - Designing workarounds so that sponsors could potentially take a refund of DB surplus and use part of it to fund pension scheme benefits outside of the scheme. This could allow surpluses to be used to improve outcomes for DC scheme members, even if the schemes are not under the same trust.  There is currently a lottery as to whether DC schemes are in the same trust as the sponsor’s DB scheme, or in a separate trust.

    - Making it easier to agree benefit improvements for a scheme’s DB members, potentially in conjunction with some return of surplus to the sponsor. 
  • Overall, we expect the ability to access surplus for an ongoing scheme would enable sponsors and scheme members to benefit, and we expect sponsors to be more willing to contribute to DB schemes and to take more investment risk where appropriate. This could include some productive investment. We note that there are risks in facilitating returns of surplus, depending on how surpluses are owned and shared. Decisions to share surplus between members and the sponsor seem less likely to indicate misuse, hence we are against a statutory override and would prefer trustees to retain some power in these decisions to ensure members’ interests are taken into account.
  • We also call on the Government to consider measures to allow insurers to accept illiquid assets directly from schemes as part of a bulk purchase annuity deal. This would lessen the need for DB schemes to maintain liquidity in anticipation of a possible transfer in an insolvency and wind-up scenario, and would help them to hold more productive assets (of an appropriate nature for the DB liabilities). It would also reduce the inefficiencies created when DB schemes disinvest as they prepare for a transaction, only for the insurer to reinvest in similar assets. 
  • The Government is also exploring the idea of allowing DB schemes to opt into a higher benefit guarantee from the PPF, which would provide more comfort to trustees and members, but would potentially also encourage trustees and sponsors to take more investment risk, which could increase productive investment. However, there are a number of complex issues to resolve, including how higher guarantees would be paid for, the risks of schemes selecting against the PPF (which they are currently not able to do), and whether the Government (which ultimately means tax-payers) would stand behind these higher guarantees. We would expect all these issues to need to be the subject of further public consultation before any final decisions are made, as they pose significant risks to the current success of the PPF.
  • Overall we do not believe that schemes should have an investment strategy whose primary purpose is to provide a return of surplus or to boost productive investment. The primary purpose should be to provide and protect members’ benefits. Removing disincentives to building up a surplus position is quite different to actively encouraging schemes to build up surplus by taking more risk through productive investment.
  • Consolidation, which is another focus for the call for evidence, has potential advantages for trustees, corporate sponsors and scheme members, particularly of some smaller schemes, but consolidation is not straightforward to achieve for DB schemes and it may take some time to produce the scale needed to materially increase investment in productive assets. While there are still around 5,000 DB schemes in the UK, the majority of the assets are already held by a much smaller number of the larger schemes, many of which are already at the scale required to consider investment in productive assets. The PPF’s Purple Book data states that large schemes with over 5,000 members make up 7% of schemes but almost 75% of total assets.
  • It is important to remember that none of the changes suggested are specifically directed at increasing productive investment in the UK. While we would expect some impact, there are no guarantees that schemes will invest in the UK. The need for diversification and liquidity will remain even if productive investment increases. To significantly increase investment in a certain area, we believe there would need to be specific incentives, most likely monetary incentives (such as a reduced PPF levy in respect of UK investment relative to non-UK), although increasing the ability of schemes to pass illiquid assets to an insurer as part of a buy-out transaction would also help. 


For more information on Mercer’s response to the Government’s calls for evidence and other consultations please contact Jonathan MacPherson at  

James Brundrett
Tessa Page
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