In considering how to distribute defined benefit surplus before wind-up, pension professionals put benefit security through buyout first, closely followed by the source of funding, a recent poll suggests. 

The government has recently said that it plans to include measures in this summer’s pension schemes bill that will allow sponsors and trustees to release DB surplus before a buyout or wind-up. 

Polling about 300 pension professionals at a recent event, the Society of Pension Professionals found that 39% considered ‘members receiving promised benefits in full through buyout’ the main factor before distribution can take place, but 36% said the source of surplus was key, namely if contributions came mainly from the employer or members. 

What happens with DB surpluses that are distributed is bound to be controversial, with DB members often feeling aggrieved if they do not receive a share. In 2023, members of the BP Pension Fund cited the scheme’s large surplus when they threatened legal action against BP over its refusal to pay discretionary pension increases.   

After securing buyout and checking the source of surplus, 13% of attendees would consider if the employer has taken the downside risk of underfunding, plugging a deficit, and 8% cited members’ needs and whether there is enough inflation protection built into the benefits. Three per cent would look at the scheme’s previous practice around discretionary benefits.   

Perhaps surprisingly, just 1% consider the employer’s financial position a key factor, despite schemes in run-on being reliant on the employer if their funding position deteriorates.

Director of derisking at Capita Pension Solutions Colin Parnell, who chaired the event, said it was “fascinating to find the broad range of opinions” about the most important factor when determining the destination of a DB surplus.   

“As expected, securing existing member benefit promises was the top priority, but most employers will be happy to see that their considerable contributions over the years are also given a very high weighting,” he said.

Parnell predicted that the practicalities of surplus distribution will be front and centre of many trustees’ minds in the months and years ahead.  

Participants in the poll were also asked to share how many of the schemes they advise on a potential transaction might expect a surplus of 5% or more. Nearly half of respondents (45%) said about half of their schemes, and 32% said more than half. Nearly a quarter (22%) chose “a minority”, with just 1% saying “none”. 

Some firms with hybrid schemes already use DB surplus to fund their money purchase employer contributions, but numerous companies could be looking for a short-term boost to their balance sheets from DB surpluses, some having plugged scheme funding deficits in previous years. It is as yet unclear how the pension schemes bill will ensure that any money released to sponsors will remain in the UK or even be invested in the country. The government has cited UK economic growth as the reason for allowing surplus release. Returning pension surplus to a sponsor attracts a 25% tax charge, the calculation of which is itself the source of some debate.