An upcoming consultation on defined benefit schemes will look at surplus distribution where the scheme rules do not specify a recipient, a recent Work and Pensions Committee meeting has revealed. At the same hearing, pensions minister Paul Maynard said that surplus extraction was “one of the options that trustees can take to improve the viability of a scheme". 

Economic secretary to the Treasury Bim Afolami told MPs that scheme rules define where surplus goes but said where the rules are silent, there should be regulations around it. 

An upcoming government consultation on DB, announced in last year’s Autumn Statement, will include proposals about surplus where its recipient is unclear, he suggested. The government previously said it would launch a public consultation to consider the details of measures to make surplus extraction easier, including design, eligibility, safeguards, and the viability of a 100% Pension Protection Fund underpin. 

At the Work and Pensions Committee hearing on Wednesday, Afolami said: “You are right to think, ‘Look, we’ve just got to be careful, how do we allocate surpluses where they appear if that is not already set out in the scheme documentation’. And that’s what the consultation’s looking at.” 

The consultation, he added, will be published “soon”.   

The destination of DB surplus varies by scheme, depending on what the relevant scheme rules say. Many rules give either the company or the pension trustees, and in some cases both together, discretion to enhance member benefits before any remainder is returned to the sponsor. Where the rules are silent on the recipient, the fate of the surplus is contentious and could end up in court. 

Afolami made his comments on surplus jumping into the conversation after the pensions minister said that making surplus extraction easier would help schemes become fully funded. The Treasury has recently cut the charge on returning pension surplus to employers to 25% from 35% and has been talking about potential other "flexibilities" on surplus extraction.

Maynard told the committee: “The journey towards being fully funded can take many routes, it isn’t just by minimising risk, you can actually use ideas like surplus extraction to improve the speed at which you can reach being fully funded.” 

He later reiterated this, saying: “I want to be able to put money in the scheme, because surplus extraction can be one way to ensure a scheme is fully funded. This isn’t the only way but it’s one of the options that trustees can take to improve the viability of the scheme in my view.” 

According to the Department for Work and Pensions, the minister was referring to underfunded schemes investing more in productive assets if surplus can be taken out more easily. 

In a 2023 call for evidence on options for DB schemes, the DWP asked among others if enabling trustees and employers to extract surplus before wind-up would encourage more risk to be taken in DB investment strategies and enable greater investment in UK assets, including productive finance assets. 

In its response from last November, the department said: “Respondents noted that additional flexibilities would likely lead to riskier investment strategies.” 

However, it added: “Respondents indicated that even if schemes were incentivised to re-risk, increased investment in UK productive finance would not necessarily follow on the basis that productive investments are complex and would be challenging for many schemes to invest in.” 

In addition, scheme rules often do not allow access to surplus until wind-up, but the government suggested it could bring in a statutory override.

The DWP's consultation response noted: “Respondents... highlighted that existing legislation and trustee fiduciary duties make [extracting surplus before wind-up] undesirable or impractical.”