A question of surplus

DB surpluses are moving up the agenda

Stronger funding positions and the Government's proposed surplus reforms mean more trustee boards and sponsors are thinking about a question that would have seemed unlikely a decade ago: what should happen when there is money left over?

Even where a scheme has completed an insurance transaction and members' benefits are secure, agreeing how any remaining surplus should be used is rarely straightforward. The sums involved can be significant, and trustees and sponsors may have different views on the most appropriate outcome.

For trustees, the focus may often be on whether members should take a share of the surplus assets. For sponsors, the discussion may centre on how surplus can be used most effectively, whether through a refund, supporting another pension arrangement or wider business investment.

The Government's proposed changes to DB surplus flexibilities could widen the options available to schemes. One area that will become key is trustees and sponsors understanding what methods of surplus distribution have worked elsewhere and why.

Drawing on our experience of supporting 150+ schemes through the post-transaction phase, we looked at cases where surplus was ultimately distributed.

Who benefitted from the surplus?

Our analysis shows there is no one-size-fits-all approach.

In around half of cases, the sponsor was the sole beneficiary of the surplus. Members were the sole beneficiary in 14% of cases, and 36% of the time the surplus was shared between both parties.

Where surplus is shared, it is most commonly (but not always) shared equally between members and the sponsor

How do sponsors distribute DB surplus?

A refund to the sponsor was the single most common  outcome, accounting for 43% of cases. However, where sponsors had input, there were several other routes depending on their objectives and wider commitments.

Interestingly, we found that in nearly a quarter of cases, sponsors redirected the surplus back into another group pension arrangement, including DC or “sister” DB Schemes with the same or overlapping DB memberships.

This reflects the reality of many surplus discussions. Trustees and sponsors are often looking for an outcome that recognises the interests of multiple parties, rather than directing all of the value to a single one.  This can create opportunities to reach an outcome that works across a wider workforce, rather than viewing the surplus decision solely through the lens of the scheme being wound up.

How are surpluses being distributed?

How can members benefit from a DB surplus?

Where surplus was used to improve members’ benefits, one-off uplifts were the most common approach, used in roughly two-thirds of the time. Other approaches included improving pension increase caps, using enhanced factors and selecting a more generous GMP equalisation method.

However, this doesn’t mean that one-off uplifts are simply the Trustee’s preferred choice. Practical considerations can be just as important as the principle behind sharing surplus. Trustees and sponsors should consider whether an enhancement can be:

• accurately calculated;
• clearly communicated to members;
• administered without disproportionate cost or delay; and
• accommodated by the insurer.

Insurer appetite and operational processes can have a significant influence on the options available. An attractive enhancement on paper may be less convincing if it is difficult to insure, creates additional data requirements or delays the transition to buyout and wind-up.

What the Pension Schemes Act 2026 changes for surplus

We expect that the additional flexibilities introduced in the Pension Schemes Act 2026 may impact some of the choices made by Trustees. Different options may become available before and after scheme wind-up, so care will need to be taken over the process. We are beginning to see more schemes opt to complete additional analysis before triggering wind-up to navigate this, and to support discussions between trustees and sponsors early on.

What benefit enhancement method was selected?

What should Trustees and sponsors do now?

A good starting point is to review the scheme rules and take advice early. In some schemes, the rules are clear about what must happen to any surplus and leave little room for choice. Other schemes give trustees more discretion. Where there is discretion, trustees and sponsors should agree the principles that will guide their discussions before they start negotiating the amounts involved.

Again, the changes introduced by the Pension Schemes Act 2026 may provide additional flexibility to alter restrictive scheme rules. However, it remains to be seen whether Trustees will view this as appropriate in many cases, and what the legal advice will support.

Over the past 12 months, we have seen several cases where surplus was materially higher than expected, or where a surplus emerged late in the process. This can happen for a range of reasons, including changes in market conditions, insurer pricing, any unexpected data issues, and the final terms of a transaction. A scheme that assumed only a modest surplus may therefore find itself facing a much more challenging decision further down the line. Having discussions on these potential issues early can help avoid delays and more difficult conversations later on.

Questions to consider as part of these discussions could include:

• What is the purpose of any surplus?
• What outcome would be fair to members and the sponsor?
• Does the scheme’s history matter? For example, past contributions or benefit changes?
• How and why did the surplus arise?
• Which options are workable once tax, legal, insurer and administration considerations are taken into account?

Proposed changes to the surplus rules could bring these conversations forward. If schemes have greater scope to access surplus before wind-up, trustees and sponsors may need to address it as part of their wider endgame planning, alongside funding, investment, member benefits and the sponsor’s objectives.

The key is not to wait until the numbers are known. Agreeing the principles early gives trustees and sponsors a better chance of reaching an outcome that is fair, practical and able to stand up to scrutiny by both members and the Regulator.