Reimagining DB Surplus for today’s workforce​

Many defined benefit (DB) pension schemes are now in a markedly different position from just a few years ago. Strong funding levels, favourable market conditions and evolving policy developments have left many schemes holding material surpluses, whilst being closed to future accrual. ​

For employers, this raises a key question: how can surplus assets be used most effectively?​

Scottish Widows is seeing increasing interest in solutions that position DB surplus as a means of also supporting today’s workforce. In particular, using surplus to fund defined contribution (DC) benefits is emerging as a practical and attractive option. ​

Recent policy and legislative developments have improved both the accessibility and attractiveness of DB surplus:​

• The tax charge on surplus refunds to employers has reduced from 35% to 25%, strengthening the financial case for utilisation ​
• Proposed legislative changes are expected to streamline the process for returning surplus, subject to trustee agreement and appropriate advice​
• Measures introduced by the Pensions Act are expected to provide greater flexibility in how surplus can be used to support member outcomes. ​

At the same time, many DB schemes are strongly funded, with significant aggregate surpluses across the market. ​

Taken together, these developments are prompting employers and trustees to reassess the role of surplus within their overall pension strategy. Rather than viewing surplus purely as a source of extraction, there is an increasing focus on how it can be deployed more strategically to deliver long-term value for both the business and its workforce.​

One such solution is the opportunity to use DB surplus to fund DC provision. This can:​

• Offset the cost of future employer contributions​
• Support enhancements to DC benefit design​
• Better align the value of legacy DB provision with the needs of today’s employees.​

For trustees, this may also represent a more member-focused alternative to returning surplus directly to the sponsoring employer, supporting alignment between fiduciary duties and scheme objectives.​
 

In-scheme solutions​

Where a scheme includes (or can introduce) a DC section, surplus can be retained within the existing trust and used to fund future DC contributions. This is a fairly well-trodden path for trustees and employers and has a number of advantages:​

• Assets remain within the scheme​
• Trustee oversight and governance are maintained​
• Implementation can be relatively straightforward within the existing structure.​
   

Surplus transfer solutions  ​

Where employers are seeking greater structural simplification it may be possible to transfer surplus, alongside an identified member cohort, into a master trust arrangement. The benefits of moving to an outsourced model can include:​

• Reduced governance, administrative and regulatory burden​
• Access to scale, broader investment capabilities and enhanced member engagement support​
• The additional protections of an authorised master trust regime, including ongoing regulatory supervision and capital adequacy requirements.​

The appropriate approach will depend on the specific circumstances of the scheme, including funding position, benefit design, long-term objectives and the strength of the employer covenant.​
 

Collaboration and early engagement 

Whichever route is taken, early and constructive engagement between employers and trustees is critical. The use of surplus must be consistent with:​

• Scheme rules​
• Trustee duties and member interests​
• The legal, regulatory and tax framework.​

A well-structured approach, supported by appropriate advice and robust governance, is essential to ensuring both compliance and successful delivery. ​
 

Unlocking the opportunity​

DB surplus represents a significant strategic opportunity, but one that needs to be approached with care and discipline.​

For many schemes, the optimal outcome will not be the straightforward extraction of value, but a more considered approach that connects past funding success with future workforce needs.​

The Scottish Widows Defined Benefit Surplus Solutions guide (PDF, 2MB)explores these themes in greater detail, including practical frameworks and case studies that demonstrate how these approaches can be applied in practice.​

DB surplus presents a genuine opportunity but also an important responsibility. With the right structure and governance, it offers a clear opportunity to connect past funding success with future member outcomes, turning surplus into something that works harder for both employers and their workforce.​