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Chief Executive Officer (CEO)
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Published:
08 / 05 / 2025
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Unlocking DB pension scheme surplus – striking the right balance
For the pensions sector, the coming months look set to be busy. We have the Pension Schemes Bill, the government’s response to the first phase of the pensions review and its response to the Options for DB schemes consultation.
The Options for DB schemes consultation response should set out further detail around plans to allow well-funded DB schemes to release surplus back to sponsors – a proposal widely welcomed by the sector.
Research we conducted via mallowstreet at the start of the year with 21 UK defined benefit (DB) schemes with over £1 billion of assets under management (AUM) and combined assets exceeding £290 billion found that 86% of these schemes believe the government should ease access to surplus and 62% indicated that such changes would encourage them to continue running their schemes rather than pursuing a buy-out.
Currently, employers are responsible for all funding obligations for their pension schemes but have very limited access to any upside other than at wind-up. The new rules would provide sponsors with a clear incentive to run on their pension schemes – at least for an extended period of time.
Having a greater proportion of schemes running on would be advantageous for government as pension schemes have the flexibility to invest in a wider range of assets than insurers and provide much needed support to the UK gilt market, and the release of surplus would support investment and the economy.
For sponsors, it could provide funds to reinvest in their own businesses priorities, with the potential to pay discretionary benefits to members of the DB scheme or fund payments to the defined contribution scheme.
But, to maximize the benefits of this policy, it is crucial to balance protections for members with flexibility and simplicity.
At the recent PLSA investment conference, the Pensions Minister Torsten Bell emphasised that surplus release would only be permitted “where it is safe to do so and where trustees agree.” He added that trustees “are best placed to determine, in consultation with employers, the appropriate use of any surplus in their scheme.”
From the statements, the government has made, it seems likely that it will allow surplus release when a scheme is fully funded on a low dependency basis, rather than a buy-out basis. This basis was set by The Pensions Regulator (TPR) to be highly secure.
Setting it at this level, makes sense. Allowing surplus release only for schemes at full funding on a buy-out basis would be less attractive for most sponsors and could undermine the success of the policy, especially in the near term. A gradual release of surplus funds over time reduces the regret risk of large one-off payments and allows surplus funds to be generated and released on a more predictable and stable basis. This approach could be structured as a ‘surplus recovery plan’ to mirror the ‘deficit recovery plans’ that currently exist in the DB funding regime as part of a code that provided guidance on how to facilitate run-on and for how to safely extract surplus.
This would remove the potential for conflict between trustees and sponsors that could arise due to the subjectivity of discount rate setting, whereby, for example, sponsors may be incentivised to maximise the discount rate to extract surplus sooner and trustees, and their advisors, may be incentivised to be overly prudent.
There has been discussion about whether it is necessary to provide a 100% Pension Protection Fund (PPF) underpin to give trustees greater confidence in agreeing to release surplus. However, we believe that a flexible regime built around required funding levels and a holistic package of supporting security reflecting scheme-specific circumstances would be sufficient.
The government’s plans to ease surplus access for DB pension schemes represent a significant step towards fostering a favourable environment for DB run-on. By providing clear guidance and balancing protections for members with flexibility, this policy has the potential to encourage more schemes to run on, ultimately benefiting sponsors, members and the UK economy.
If you are interested in finding out more about how Brightwell can develop innovative solutions for your scheme, please contact us at hello@brightwellpensions.com.
