Investors have called on the UK government to reform defined benefit pensions.

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The UK government must prioritize reform of the UK’s £1.2tn defined benefit system to unlock billions of pounds for investment, asset managers say.

In November, the government announced plans for a series of “megafunds” in defined contribution (DC) and local government pension schemes to invest more in British infrastructure and fast-growing companies.

But it has yet to draw up plans for corporate defined benefit (DB) pension schemes, although a consultation from the previous government earlier this year explored options for companies to make scheme profits, which could encourage them to invest more in risky assets.

Jos Vermeulun, head of solutions design at Insight Investments, which manages £665bn of assets, said: “We think it’s important that DB schemes are seen as a priority – they have the potential to get money into the ground faster than other areas. In the UK.

“There is potential to release up to £100bn over the next 12 to 24 months. . . . This is a once-in-a-generation opportunity to change the fortunes of the UK. . . . If you miss that opportunity, it could be gone forever,” he added.

Owen McCrossan, head of investment for Aberdeen Group’s pension schemes, said DB pension schemes were “really a pool of capital to help fill the gap in producer finance”.

A 5 per cent allocation to productive assets such as real estate and infrastructure “could raise around £50bn”, he said.

That’s the amount under the government’s plan to introduce productive assets by 2030 to consolidate defined contribution workplace schemes into at least £25bn of asset funds.

Calls for the government to reform the rules around DB schemes have come as it has delayed the assessment of pension eligibility. The review is expected to lead to plans to increase the value of self-enrolment pension savings, which the government hopes will lead to more investment in the UK.

Vermeulen said DB’s pension reform was a key element to be included in the pension bill by the middle of next year.

In an interview with the Financial Times last month, Pensions Minister Emma Reynolds said she prioritized reforming defined contribution workplace schemes because that was “where the growth is”.

She noted that most corporate defined benefit pension schemes were closed to new members and had “a bit longer by nature” as schemes moved into less risky assets or sold their pension obligations to insurance companies.

But industry insiders say radical changes in the funding structure of defined-pension plans in recent years have put many at risk now.

To encourage schemes to “work” and invest in productive British assets, Vermeulen proposed that the Pension Protection Fund cover 100 per cent of pensions when the scheme is unable to meet its obligations. Currently, it pays from 70 to 90 percent.

As a result, the annual PPF levy will have to rise, but the government can waive the levy if a fund invests a certain amount in British infrastructure or top-tier companies.

“The government can go further, to encourage plans to invest in productive assets, if you invest 5 percent you will pay zero tax,” said Vermeulen.

Companies are rushing to offload their pension obligations to insurance companies, with £60bn worth of transactions last year, according to the PPF. But this will be reduced if schemes ensure full protection from PPF and companies benefit from profits.

In its response to the first review of pensions, the Investment Association, which represents the UK fund management industry, urged the government to “allow for safe funding” of DB schemes, despite being outside the scope of the review.

“While certain safeguards are placed around profit making to ensure that safety net benefits are not diluted, the ability to make profit can provide an incentive to build profits by taking on more investment risk in line with the government’s broader objectives,” the IA said.

The Department for Work and Pensions said it was reviewing responses from the previous government’s consultation on options for defined benefit schemes and a decision on profit flexibility “will be made in the coming months”.