Legislation will aim to make it easier for companies to access surplus from ongoing defined benefit schemes, the prime minister is to say to business executives today. The proposals come as new figures suggest a £7bn surplus on a solvency and £207bn surplus on a technical provisions basis in the DB universe. 

Prime Minister Sir Keir Starmer said the changes will “unlock billions of investment”. 

Legislative changes could enable all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement, the government suggested in an update on Tuesday. It did not say whether the proposal would be included in this year’s pension schemes bill.

The government will share details of the proposals in the spring, when it is due to respond to the previous government’s DB consultation. 

Pension trustees and the sponsoring employers could “use this money to increase the productivity of their businesses – to boost wages and drive growth or unlock more money for pension scheme members”, the government said. 

The suggestion appears to be that agreement between companies and trustees is needed for surplus to be accessed from ongoing schemes, so that trustees can assess how scheme members can also benefit. 

The government has not mentioned the 25% tax on surplus extraction and whether any further reduction to this is planned. Given this tax and the funding volatility of DB schemes, it is unclear if many sponsors will see any benefit in running their scheme on with a higher risk investment strategy, over the tried and tested path of derisking and accessing any remaining surplus on buyout. There is also the threat of fines of up to £1m or even a jail sentence of up to seven years for conduct risking accrued scheme benefits, under the Pension Schemes Act 2021.

But the government needs growth, and perhaps what it needs even more from DB is gilts buyers, which means it has to try to convince sponsors to keep DB schemes going for longer. 

The Pensions Regulator has expressed its support for the proposals, provided benefits are not put at risk.

Chief executive Nausicaa Delfas said: "Our first priority must be to ensure pension scheme members have the best chance of receiving their promised benefits. Where schemes are fully funded and there are protections in place for members, we support efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy."

TPR has published new figures on DB funding, having been asked to provide them by the Department for Work and Pensions. These show that in September 2024, DB schemes were, on aggregate, 101% funded on a buyout basis, with a £7bn combined surplus. Funding was 112% on a low dependency basis and 120% on a technical provisions basis. It found 82% of schemes were in surplus on a TP basis, while this only applies to about half of schemes looking at a buyout basis. 

The government is to say that restrictions will be lifted on “well-funded” schemes but has not yet revealed the funding basis it will rely on.  

The director of policy and advocacy at the Pensions and Lifetime Saving Association, Zoe Alexander, said the PLSA backs surplus release “with the right protections in place” for member benefits.  

“Surpluses could be used to increase DB scheme benefits or could be redirected to fund contributions to sponsoring employers’ defined contribution workplace schemes,” she said. 

Alexander added that “lowering the legislative threshold for allowing returns of surplus could potentially encourage trustees, in conjunction with their employers, to adopt a more ambitious mindset and take on slightly riskier investment strategies for their DB assets, including greater investment in UK assets”.

Alan Pickering, professional trustee at Bestrustees, is unconvinced the proposals will change much in the current trajectory of DB. 

 

“Some employers may find this worthy of consideration, but they will have to weigh up the costs of running a scheme on and the impact on corporate bandwidth that being responsible for running a legacy pension scheme will have,” he said. 

 

He does not think surplus extraction will make a big difference for UK growth, either, saying this is chiefly the responsibility of the government – and instead suggested that putting DB to bed could be more impactful.  

 

“Finding a way of bringing DB legacy schemes to a satisfactory conclusion could have a significant impact if it frees management time from devoting resources to honouring past promises,” Pickering said. 

 

How companies would use extracted surplus can vary, but he said many are currently returning money to shareholders either as dividends or share buybacks.

“It is unlikely that many companies will see a pension scheme surplus as a means of making investments that they might not otherwise undertake,” he believes. 

 

However, like Alexander, he said some employers might be encouraged to engage to a greater extent with their DC schemes if unexpected resources become available. 

There has been little focus on improving member outcomes in the government’s DC consolidation drive, which was instead all about increasing investment in UK productive finance, said managing director of trustee firm Zedra Governance, Kim Nash. 

Nash said member outcomes are key to the decision making in DB surplus extraction.

“Any surplus distribution will need careful consideration to ensure the security of members’ benefits are not put at risk,” she said.

If the chancellor is going to override scheme rules to release surplus then it is imperative that decisions need both trustee and employer agreement, said Maggie Rodger, who co-chairs the Association of Member Nominated Trustees.

"There must be substantial safeguards in place to protect members' benefits.  And, importantly, employers must agree to stand behind schemes if there is an unexpected downturn. Trustees have a fiduciary duty to members and must be free to exercise it. Stronger employer companies and a stronger UK economy can be good for the security of member pensions, but history shows that there can be sudden reversals to asset values too," she warned.

Rodger said running DB schemes on for longer, with safeguards, would be good for members and the economy, but that any surplus released must be shared between members and employers "in a way which recognises that not only have employers paid deficit payments in the past,  but members have paid higher contributions, and/or had lower accrual rates, so have effectively overpaid for the pension benefit due to them".