Defined benefit surplus: from legislative change to strategic opportunity

For many years, the focus of defined benefit (DB) pension schemes was on managing deficits, reducing risk and reaching long-term funding targets. For a growing number of schemes, however, the conversation is changing. Improved funding levels, maturing endgame options and recent legislative developments mean that trustees and employers are increasingly considering a different question: what should be done with surplus?

As mentioned in our article earlier this year (here), the Pension Schemes Act 2026 represents one of the most significant changes to the treatment of DB surplus for many years. Draft regulations were issued for consultation over the summer, and the Pensions Regulator has published high-level guidance, with more detailed guidance promised. The direction of travel is clear: the Government wants to make surplus more accessible while maintaining appropriate protections for members and preserving trustees' role in decision-making.

A new framework for surplus

Under the existing regime, returning surplus to an employer has generally been difficult in practice. The new legislation introduces a mechanism that allows trustees to modify scheme rules to create or enhance powers permitting payments of surplus to employers, subject to statutory safeguards and future regulations. The Government has also indicated that further measures are intended to facilitate the payment of surplus-derived benefits to members in certain circumstances.

Although the reforms have attracted considerable attention, they do not give employers an automatic right to receive surplus assets. Trustees will retain responsibility for exercising the relevant powers and must make decisions in accordance with their duties and the particular circumstances of their scheme. Early indications suggest that the Regulator will focus on ensuring that trustees follow the correct process, while the difficult decision of how any surplus should be used will remain one for trustees.

Why surplus matters now

These developments come at a time when many DB schemes are reporting significantly improved funding levels. Higher gilt yields and the continued maturation of schemes have led many trustee boards to consider questions that would have seemed remote only a few years ago.

As a result, surplus is no longer simply an actuarial concept. It is becoming a strategic issue that sits alongside endgame planning, member outcomes, covenant management and corporate finance considerations.

For some schemes, surplus may support a buy-out objective by providing a stronger funding buffer. For others, it may encourage consideration of a run-on strategy, allowing assets to continue generating value for sponsors and members after low-dependency funding levels have been achieved. Some schemes may seek a combination of benefit improvements, contribution offsets and, ultimately, employer refunds.

Five questions trustee boards should ask

1. Do we actually have surplus?

Before considering how surplus might be used, trustees and employers need to understand which funding measure they are using and what assumptions underpin it. A scheme may appear well-funded on one basis but show a very different position on another.

2. How does surplus fit into our endgame strategy?

The answer may differ depending on whether the scheme's destination is buy-out, run-on or a form of long-term consolidation. Trustees should consider whether retaining surplus creates additional flexibility and value.

3. What outcomes would be appropriate for members?

Public debate about surplus often focuses on employer access to assets. However, trustee boards will also wish to consider whether members should benefit from surplus through discretionary increases, benefit enhancements or other permitted measures.

4. How should conflicts be managed?

Surplus discussions inevitably involve interests that may not always be aligned. Sponsors may wish to access value, while trustees must consider the interests of beneficiaries and exercise their powers properly. Robust governance and clear documentation will therefore be critical.

5. What preparation can be undertaken now?

Although final regulations and detailed Pensions Regulator guidance are awaited, many schemes can begin preparatory work immediately. This may include reviewing scheme rules, understanding existing surplus powers, assessing endgame options and considering the governance framework that would support future decision-making.

Looking ahead

The broad policy shift is already evident. Surplus is moving from a theoretical possibility to a practical consideration for many well-funded schemes.

The most successful trustee boards and sponsoring employers are unlikely to wait for every detail to be finalised. Instead, they will start considering now how surplus fits within their wider funding, governance and endgame objectives.

After nearly two decades of deficit management, the pensions industry is entering a new phase. The challenge is no longer simply how to fund pension promises. Increasingly, it is how to manage success.

How WBD can help

Our pensions team is advising trustees and employers on the practical implications of the new surplus regime, including rule reviews, trustee duties, endgame planning, governance frameworks and surplus-sharing structures. If you would like to discuss how these developments affect your scheme, please speak to your usual WBD contact.