So, you’ve got a surplus…
…or might have one in future
Upcoming reforms announced by the government, contained in the Pension Scheme Bill which was laid before parliament last year, are designed to make the release of surplus by UK defined benefit pension schemes easier.
Whilst it is already possible for a scheme to release surplus in some circumstances, the current criteria are relatively strict and so it is not an option that many schemes have actively pursued to date.
The potential for easier return of surplus adds a further consideration into the mix for DB pension scheme trustees who are thinking about their scheme’s future direction.
Return of surplus will likely only be suitable for a subset of DB pension schemes; this blog sets out how trustees can approach the challenge of working out whether it could be right for their scheme, and if so, under what circumstances.
The next blog (here) in this series takes a deeper dive into what pursuing a return of surplus might mean for schemes in practice.
Why return surplus?
The possibility of a return of surplus to a scheme’s sponsor presents an opportunity for Trustees to negotiate for something of value for their members in return; this could be enhanced benefits for scheme members or, in more limited circumstances, additional covenant protections.
For some schemes, such benefits are unlikely to outweigh the increase in risk arising from a return of surplus; a scheme with a weak sponsor operating in “dying” industry would almost certainly prioritise the increased security provided by buying-out with an insurer as soon as possible, above all else.
On the other hand, a scheme with a very strong sponsor and a large surplus but no power to grant discretionary increases may wish to give up some of its “excess” surplus to its sponsor in return for agreeing supplemental benefit increases to its members (either as a one-off payment or a benefit uplift). Depending on the existing balance of powers in the scheme’s trust deed, this could be a win-win for both trustee and sponsoring employer.
Sponsoring employers will also be weighing up whether a return of surplus arrangement would be beneficial to them – whilst it may mean the scheme runs on for longer and/or runs a higher-risk investment strategy than it otherwise would, thereby imposing incremental risk on the sponsor, such risks may be worthwhile for the sponsor where there is a large surplus that the sponsor could negotiate access to.
Trustees should consider agreeing a framework to help untangle the various return of surplus considerations.
A good way to start is by looking at the scheme’s ultimate objectives, and to decide whether and how a return of surplus could support these:
Consider what additional member benefits enhancements, if any, could be negotiated
What are the right margins of safety - e.g. above what funding level might surplus be returned / additional benefits be granted?
What would be an appropriate investment risk budget in a surplus-sharing arrangement?
What is the plan in adverse scenarios? (e.g. if investment strategy under-performs)
Where a scheme is hybrid DB/DC, could some of the surplus be used to support DC provision in some way?
Trustees will need to bring together multiple strands of advice: legal, actuarial/funding, covenant and investment to be able to work out:
The art of the possible
What the “ask” to the sponsor should be
In practice, there are still regulatory and legislative hurdles to come before the details of return of surplus are ironed out; in particular, there is expected to be a further government consultation on surplus release during 2026, with statute and guidance expected to follow.
Before this time, trustees may wish to consider what an initial plan of action may look like:
Ensuring long-term objectives are agreed, articulated, and up to date
Setting out a possible timeline for surplus extraction, taking into account the legislative process, the timing of the scheme’s first valuation under DB funding code requirements (including statement of strategy), plus any timing considerations from the sponsor’s perspective
At what stage to gather input from advisers: legal position, covenant strength, funding and investment
Negotiation tactics for sponsor engagement: approach and timing
Conflict of interest considerations?
Where a scheme decides to pursue return of surplus strategy, it is likely to also want to review and potentially evolve its governance structure to ensure it remains appropriate – this is covered in the next blog in this series.
How Avida can help
Avida supports pension organisations navigating strategic and governance transformation across all segments of the UK market — DB, DC, and LGPS. We help clients assess their current governance structures, benchmark them against best practice, and design fit-for-purpose models that reflect future scale, complexity, and regulatory demands.
Our team of senior industry experts has deep experience guiding clients through transitions such as in- or out-sourcing, scaling up or scaling down operations, board redesign, and fiduciary oversight.
Whether you’re preparing for LGPS consolidation, rapid DC growth, or defining your DB end-game strategy, Avida provides independent advice and hands-on support to help you manage change with clarity and control
