DB surplus sharing and DC solutions

How can the £160bn pensions schemes surplus be used effectively? 

Defined Benefit (DB) pension scheme funding levels are at record highs, with three in four schemes now in surplus. Deficit payments have dropped by over £10 billion annually, and the collective deficit has shrunk from £500 billion in 2019 to just £140 billion in 2024.*  

Schemes in surplus now hold over £160 billion collectively and, for the first time, FTSE 350 sponsors paid more into DC pensions than DB schemes in 2024.** 

This improved financial resilience, combined with Government’s “Plan for Change”, is prompting a rethink of how surplus could be used. Surplus sharing and corporate flexibility stood out as one of the recurring themes at the recent Pensions UK Conference, with discussions focused on how surplus could be used differently and more productively.
 

Regulatory shifts and greater flexibility

Surplus sharing has historically been constrained by scheme rules, the requirement for full buy-out funding, and a statutory obligation to act solely in members’ interests.  

The Pension Schemes Bill 2025 (“the Bill”) will introduce a framework that may help unlock surplus assets in well-funded schemes. Key provisions will include: 

• Lowering the threshold for surplus release from full buyout to funding on a low dependency basis.  
• Introducing a statutory override which allows trustees to modify historically restrictive scheme rules; and 
• Empowering trustees to consider broader interests, including those of the employer, while continuing to act in accordance with their fiduciary duty. 

These new provisions are expected to be in place by the end of 2027, with the aim of supporting surplus sharing even where such powers were previously restricted by scheme rules. The Bill also empowers trustees to think beyond buyout and consider opportunity for broader value creation.

Surplus sharing will continue to be subject to trustee agreement and actuarial certification, but these changes aim to help unlock surplus assets in well-funded schemes.  

While employer repayments remain subject to a 25% “authorised surplus payment” tax charge, there are growing calls to reduce or remove this where surplus remains within the pension ecosystem. 

A recent XPS Group poll*** shows that 76% of trustees are more likely to adopt the new statutory override provisions, giving themselves the power to distribute surplus. 

Further guidance from The Pensions Regulator (TPR) will help trustees navigate complex surplus decisions and their implications. It will be important for trustees to balance the benefits of surplus utilisation against potential risks, including future funding volatility, the ongoing strength of the employer covenant and reputational considerations.   
 

Practical considerations 

Reshaping DB surplus to fund DC benefits isn’t a new concept but has been constrained by low funding levels and regulatory complexity. These transactions are multi-faceted and require expert support and advice.  

Establishing a DC section within a DB scheme to accept surplus is not uncommon, but master trusts are also emerging as an alternative scalable solution for surplus deployment once the legitimacy of the payments has been established. As well as potential cost savings, employers may look to increase DC benefits.  

Scottish Widows provides DC workplace frameworks that can support surplus management strategies and present the opportunity for surplus assets to be invested effectively.  

This includes: 

• Master trust scheme rules which support surplus allocation, including transfer-in provisions, and the use of ring-fenced reserve accounts. 
• Bespoke contractual agreements, including bulk transfers and participation agreements, tailored terms and conditions and exit provisions. 
• Operational support for surplus management strategy, including the practicalities of paying contributions from the reserve account and associated reporting.   
• Systems and processes that accommodate and track contribution flows (noting that the “drip feed” of surplus over time to retain flexibility, and maintain assets on the balance sheet, may be attractive to some).
   

Aligning surplus sharing with workplace objectives 

While funding levels and regulatory change may support greater flexibility, mutual success will depend on sponsors and trustees balancing the potential benefits of surplus utilisation with future funding volatility, member security, the ongoing strength of the employer covenant and end-game planning.  

Some employers will welcome the opportunity to access additional capital while others might see a surplus as a way of helping employees afford to retire. 

Given the unique nature of each transaction, tailored solutions are essential. What looks similar on the surface can differ considerably in structure, governance and legal arrangements. It is important that solutions are flexible enough to support the specific circumstances of the surplus sharing agreement.  

At Scottish Widows, we are well positioned to help support trustees and employers with surplus sharing arrangements. With the right considerations, DC sections in hybrid schemes and DC master trusts can provide practical routes for surplus reallocation, offering scalable models and outsourced governance frameworks. 
 

Sources:

*Record pension scheme funding means up to £160 billion ready to boost growth - GOV.UK

**FTSE 350 DB Pension Scheme Report 2025 - WTW

***XPS Group poll finds 76% of trustees intend to adopt new statutory override for DB surplus - XPS Group