Optimising DB pension surpluses: Converting strong funding positions into real value for members and sponsors

Why DB pension surpluses have historically been locked away

For decades, surpluses in UK defined benefit (DB) pension schemes have remained effectively “locked away” behind restrictive funding rules, tax barriers, and legislative barriers.

Today, however, a wave of regulatory reform is reshaping how trustees and employers may access and deploy these surplus assets, unlocking opportunities for scheme members, scheme sponsors, and for the wider UK economy. 

This change comes at the same time that DB pension schemes are enjoying their strongest funding levels in decades, a remarkable shift from the deficit dominated landscape of the 1990s and early 2000s. Improved investment returns and years of substantial sponsor contributions mean many schemes are now reporting significant surpluses.

The new challenge for trustees and sponsors

With stronger balance sheets than ever, sponsors and trustees therefore face a new challenge: how to use surplus in a way that maximises value without compromising long term security. 

Four ways to use DB pension surplus 

There are lots of options available to consider, but in very broad terms, these can be grouped together into four different buckets. Schemes don’t have to pick just one option, and indeed they could and often pick multiple options either within the same or across different buckets. 

1. Improve level of benefits for current DB scheme members 
2. Reduce risk and costs in the DB scheme 
3. Support ongoing pension provision (both inside and outside the DB scheme) 
4. Return surplus to the sponsor 

How trustees and sponsors are approaching surplus in practice

There is no one‑size‑fits‑all answer. The measure of surplus, the strength of covenant, and the adopted endgame strategy all matter. At a recent webinar, we asked the audience (a mix of trustees, sponsors, and pension professionals) what their focus will be for using DB surplus over the coming years. The survey answers are below, with clear focus on reducing risks and costs (ie increasing security of existing benefits) and returning the surplus to the sponsor. Interestingly, the least favoured option was to enhance the level of benefits for existing DB pension members. 

Even small changes in approach matter. A shift of just one percentage point in a scheme’s funding level can materially alter the scale of available benefit improvements or sponsor refunds. That’s why many schemes are developing structured surplus frameworks linked closely to their endgame plans.

Putting surplus frameworks into practice

Surplus frameworks can support enhanced benefits such as uncapped increases, funeral grants or one‑off lump sums, provide pension contributions for the sponsor’s wider employee base, and also create options for direct cash payments to sponsors where appropriate.

With the government preparing new surplus‑access flexibilities, insurers competing at record levels, and a material surplus now sitting in UK DB schemes, the decisions sponsors and trustees make in the next 18 months will shape benefits and corporate balance sheets for decades.

Practical examples of surplus sharing

There are many practical examples that show what’s possible, and we’ve been able to work with clients to develop surplus sharing agreements that:

• allow the sponsor to use DB surplus under controlled conditions for ongoing accrual (both DB and DC) as well as expenses. Funding and covenant oversight ensured appropriate safeguards, while the arrangement enabled the scheme to remain open to accrual offering long term value to both employees and the employer. 
• split the DB surplus at wind-up. Part of the surplus was used to uplift DB benefits and the remaining surplus used to support ongoing DC contributions. The outcome was improved DB benefits for members and a DC contribution holiday for the employer.