Most pension schemes undecided on surplus use
More than three-quarters of UK defined benefit pension schemes in surplus and planning to continue operating have not yet determined how to distribute excess funds between employers and members, new research shows.
The survey by Aon, which included 350 schemes, revealed that 76% of those running with a surplus remained undecided on distribution. Among the minority that had made a decision, 62% planned to return part of the surplus only to the employer, while 17% would allocate it solely to members. The rest intended to divide it between both.
Schemes are delaying decisions as they await new flexibilities for surplus distribution, which will take effect in April 2027. Aon stated that the findings showed many schemes were keeping their options open ahead of the new DB surplus flexibilities.
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Half of the schemes already able to secure full benefits through an insurance buyout had not yet agreed on surplus distribution. Of those that had, two-thirds planned to return the excess only to the employer, while the remainder would share it with members or direct it entirely to them.
James Patten, a partner in Aon’s UK endgame strategy team, said the uncertainty was notable given that 57% of schemes were already fully funded on a buyout basis. “It therefore seems that there is all to play for as schemes consider the new surplus flexibilities to be introduced next April.”
For schemes choosing to continue rather than wind up, Patten noted that returning surplus to the employer could initially mean using it to fund expenses, ongoing DB accrual or employer defined contribution (DC) contributions. He added that many of these positions were likely to be revisited by trustees and sponsors ahead of the 2027 changes.
The eventual use of surplus for schemes moving toward buyout often depends on existing rules. The survey found that half of respondents had rules allowing the employer to decide surplus distribution upon wind-up.
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Patten said the new flexibilities could therefore prompt discussions about whether some surplus above the amount needed for buyout could be distributed earlier, rather than waiting for the full buyout and wind-up process to complete.
Most schemes had not yet set a formal threshold for when surplus could be released. Among those that had, 73% adopted a threshold above the low-dependency funding basis proposed as the minimum. Aon suggested this could include a buffer above low dependency before trustees were prepared to permit surplus extraction.
Patten added: “Where a decision has been reached, it is notable that the vast majority are adopting a threshold generally above the minimum low dependency basis proposed under the new surplus flexibilities.”
