UK DB funds rethink endgame amid surplus extraction plans

Many defined benefit (DB) pension schemes are reconsidering their endgame plans in light of improved funding levels and the prospect of changes to the government rules on how pension surpluses can be used, according to a survey of Pensions and Lifetime Savings Association (PLSA) members.

After talking for decades about how a funding crisis in the nation’s £1trn (€1.2trn) DB pension scheme sector, successive interest rate rises and prudent scheme management mean final salary schemes now have £239bn in aggregate surplus.

At the beginning of the year the UK government announced plans to tap into DB surplus for economic growth by lifting restrictions on how well-funded DB schemes can invest their surplus funds.

The PLSA has surveyed its members to understand how these changes are influencing trustees’ plans and received 96 responses from members between 13 and 25 February 2025.

One in five (20%) of those surveyed  said their investment adviser or consultant suggests they change their approach in light of changed market conditions.

Over half of the respondents said their sponsor is interested in extracting surplus (56%), with three in 10 extremely or very interested (30%).

Among those interested in extracting surplus, over half said they would use it to invest in the business (55%), with a third saying they would spend it on their defined contribution (DC) plan (32%).

Two-fifths (42%) of those surveyed agreed that enabling trustees and employers to extract surplus in DB schemes before wind-up will encourage more investment risk to be taken.

Reflecting pension trustees’ duty to act in the best interests of members and protect benefits, more than seven in 10 (73%) believed that surplus extraction should always be at trustee discretion.

The survey also showed that two-thirds (65%) of those surveyed said surplus should only be able to be extracted if the surplus in a DB scheme reaches a certain level. Half were worried about unreasonable demands from employer(s) to scheme in relation to surplus release (50%).

The PLSA said it advocated for “strict rules” governing the release of surplus, with criteria around funding levels and low dependency on the sponsoring employer. Other conditions that should apply include that the employer must be in a good financial position with a strong covenant in place along with agreed regulatory definitions, it added.

Joe Dabrowski, deputy director of policy at the PLSA, said the evidence suggests funds and employers are planning to run on for longer, and are willing to explore different endgame solutions and seek to find ways to use surpluses productively.

“Even accounting for their legal duty to ensure the members of their schemes get the pensions they are promised, many pension managers now think there would be benefits, with the right controls, to permitting trustees and employers to put surplus funds to more productive use – for example by enhancing member benefits, DC contributions, or investing in growth,” he said.

Commitment

So far, only two organisations have committed to running on and taking advantage of their surplus following the government’s announcement, however there appears to be wide support from trustees.

Schroders has said it will leverage a portion of its surplus to partially fund its DC commitments.

As a result, the trustees of the Schroders Retirement Benefits Scheme (SRBS) will be able to use approximately 10% of the DB section’s surplus per annum to support DC members’ funding, operating within key guardrails to ensure that the DB pension remains in a healthy position.

This, Schroders said, will involve regular funding level and covenant checks, as well as a mechanism to recoup contributions should the DB section’s funding level deteriorate.

Aberdeen has also agreed to unlock part of its plan’s “significant” £800m surplus to fund the cost of providing DC benefits to current employees.

The agreement, which is one of the largest of its kind, intends to enable Aberdeen’s DC contributions to be funded from the DB surplus, while largely maintaining the surplus and retaining optionality.

The changes are expected to result in an annual boost to capital generation of circa £35m starting from July 2025. DB members will, meanwhile, benefit from enhanced pension entitlements and guardrails to ensure the continuing financial strength of the plan.

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