The government has announced plans to allow trapped surplus funds to be invested in the wider UK economy, be it via wage increases, investment in equipment and development, or unlocking additional pension benefits. Against this backdrop, we revisit our research on DB surplus from 2024 to provide the evidence-based context for future regulatory announcements. 

 

 

The government has announced plans to allow trapped surplus funds to be invested in the wider UK economy. Legislative changes could enable all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement. 

 

Where trustees agree to share a portion of scheme surplus with a sponsoring employer, the money could be used to increase the productivity of their businesses – to boost wages, invest in equipment and development, or unlock additional benefits for pension scheme members. 

 

A final report on the government's proposed pension reforms will be published in the spring, chancellor Rachel Reeves said during a speech on economic growth on Wednesday morning. 

 

 

The Pension Risk Transfer Report 2024 revealed that nine in every ten schemes in surplus are two to five years away from their endgame. 

 

 

Over half of those in surplus have already conducted one or more buy-ins as part of their endgame prep. Few have increased their LDI hedge or conducted a longevity swap, likely reflecting the fact that they have sufficiently de-risked the scheme so far. 

 

  

 

We have also seen a departure from 2020, when most schemes expected the surplus to go to their sponsor after buy-out. Trustees now have a better understanding of their options. For example, 17% would like to use the surplus to improve members’ benefits, and another 11% will split it between members and the sponsor. 

 

The Endgame Strategy & Priorities Report 2024 looked at larger DB schemes instead, and provided a very different take on the topic. To begin with, one-half of large schemes targeting run-on did not have a surplus at the start of last year. Additionally, the surplus is simply part of their asset portfolio, and just one scheme is investing its surplus to grow it over time. 

 

As a result, investment strategy is not driven by surplus accumulation. Even if the government change the rules to make the return of surplus to employers easier (e.g. by reducing the 35% tax charge or other measures), 70% of schemes did not expect to change their investment strategy at the start of last year. Possible reasons include that the surplus cannot be extracted before winding up the scheme, and that trustees are not running the scheme with a surplus objective in mind. 

 

 

 

Even among these larger DB schemes which are running on for the time being, two in every five say any surplus should be shared between the members and the sponsoring employer. Some believe it should be given to DB members as a discretionary increase or shared with members of the DC scheme. Additionally, 22% of trustees believe the surplus should be held in the scheme in case the funding level changes, as a buffer for asset underperformance or a reserve for a future pension risk transfer transaction, minimising the burden on the sponsor. 

 

 

 

The government estimates that the combined DB surplus is circa £160bn at the moment, or about 10% of total DB assets in the country. New figures suggest a £7bn surplus on a solvency basis and £207bn surplus based on technical provisions. 

 

It remains under question how much will end up invested in UK growth, as schemes are likely to use their surplus for a range of purposes, including protecting their funding level, improving member outcomes, increasing the resilience of the sponsoring employer and investing in productive assets if their long-term objective permits it. 

 

One area to watch would be governance structures which give sponsoring employers greater power in deciding the use of the surplus, and ensuring in those cases that it is used equitably and ultimately not to the disadvantage of employees and scheme members. We expect trustees will want guardrails preventing this. 

 

We are gathering further data on surplus plans in our second annual survey in partnership with Brightwell to understand how the UK DB pensions industry may react to future government announcements. 

 

 

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