The move would see current rules relaxed to allow employers to extract ‘surplus’ cash from final salary pension schemes

Millions of retirement pots could be left dangerously exposed under controversial reforms that would let firms dip into surplus pension funds, critics have warned.

The move would see current rules relaxed to allow employers to extract “surplus” cash from final salary pension schemes.

It is claimed the change could release billions to allow companies to invest and grow, while also boosting pension rewards and pay.

Ministers say the plan is part of a broader push to unleash investment and turbocharge the economy. It is also argued that it will boost the retirement nest eggs of millions of Brits.

The new powers, set to be included in the upcoming Pensions Schemes Bill, would also give ministers a so-called “reserve power” to force funds to invest in UK-based assets, if they do not do so voluntarily.

It is claimed the change could release billions to allow companies to invest and grow (Image: Getty)

However, some critics fear the changes could make pension schemes less financially robust over the long term.

The Pension Security Alliance – a new group bringing together pension providers, insurers and campaigners – delivered a blunt warning: “Pension schemes are not piggybanks for others to dip into.”

The group added that any withdrawal of surplus funds “before members’ benefits have been secured runs the risk of those schemes running short of money if financial conditions change. In that case, some schemes could collapse.”

It concluded: “We urge ministers to think again.”

One member of the group, Dennis Read of Silver Voices, said: “If a company has cash flow problems it will be tempting to raid the pension fund, claiming that the purpose is investment, so leaving the scheme underfunded and unstable if the company collapses.”

Under Labour’s proposals, pension schemes with more in assets than needed to cover promised payouts could be allowed to return the excess to employers – after getting sign-off from trustees.

The Government claims this could be used to boost wages, fund business growth, or increase pension contributions elsewhere.

But there’s a sting in the tail: any cash taken from schemes would face a 25% tax – handing the Treasury a potential windfall of up to £40 billion.

This tax could prove a tempting source of funds for Chancellor Rachel Reeves, who is under pressure to stick to strict fiscal rules.

Sir Steve Webb, a former pensions minister now at LCP, said the money could instead be used to improve members’ benefits, including better inflation protection for service before 1997.

John Ralfe, a leading pensions consultant and chair of two schemes, echoed the concerns, saying: “The detailed regulations that ministers are proposing must make sure member security is the absolute priority. Surpluses must be defined on a tough basis. Scheme assets must also match liabilities to minimise the risk of market movements causing any future deficit.”

The backlash has come not just from campaigners but across the financial sector.

The UK Sustainable Investment and Finance Association, representing more than 300 institutions managing over £19 trillion in assets, warned the new powers could backfire.

Chief executive James Alexander said “mandation” risked “distorting markets, creating asset bubbles and potentially lowering returns for pension savers. It could also push some schemes into riskier assets than appropriate.”

Similarly, Renny Biggins of The Investing and Saving Alliance said schemes “must not be forced down a path which could jeopardise member outcomes”.

The Department for Work and Pensions insists there will be “stringent safeguards” to ensure any surplus withdrawals are in members’ best interests and approved by trustees.

It claims the reforms could “benefit both employers and members” and help unlock billions that are currently locked up in schemes with surplus assets. The government estimates around £160bn is currently sitting in such surpluses, with other forecasts putting the figure as high as £360bn.

Daniela Silcock, a pensions expert, suggested the changes could offer some upside – if properly managed. “A change that encourages more schemes to continue running and to pay benefits directly, rather than transferring to an insurer, could help members by maintaining flexibility, avoiding transaction costs, and potentially preserving higher benefit value,” she said.