Surplus extraction rules prompt DB rethink
After the government signalled it may relax current rules around surplus extraction, which restrict how trustees and employers can use excess funding, the PLSA surveyed its members to gauge their reactions. DB endgame strategies have traditionally focused on full buyout or transfer to a consolidator, but the improved funding outlook is creating new possibilities. Trustees may now consider running schemes on beyond full funding to deliver member benefit improvements or support wider business or scheme-related investment goals.
According to the survey, one in five schemes (20%) said their investment consultant or adviser had recommended changing their approach in light of market conditions. Over half (56%) reported their sponsoring employer is interested in extracting surplus, while 30% said the sponsor is extremely or very interested. Among those considering surplus extraction, most would use the funds to invest in the business (55%), while others would put the surplus towards their defined contribution (DC) plan (32%).
Joe Dabrowski, Deputy Director of Policy at the PLSA, said the shift in funding had prompted a wider change in approach. “The recent improvement in funding levels has seen an accompanying shift in sentiment among defined benefit schemes,” he said. “Evidence suggests funds and employers are planning to run on for longer, explore different endgame solutions and seek to find ways to utilise surpluses productively.” However, with policy change on the horizon, many in the industry are watching closely to see how the government defines the conditions under which surplus can be released.
An invitation to take on more risk?
Some survey respondents suggested greater flexibility could lead schemes to take on more risk. Two in five (42%) said allowing surplus extraction before wind-up could encourage greater investment risk. But despite the growing interest in surplus extraction, trustees remain cautious. The PLSA found 73% believe any surplus release should always be at the discretion of trustees. A further 65% said surplus should only be accessible once it reaches a certain level, and half of those surveyed (50%) expressed concern about unreasonable demands from employers for access to scheme funds.
Safeguards still needed
The PLSA has called for strict conditions to govern any future changes to surplus rules. These include robust funding thresholds, limited reliance on the sponsoring employer, and financial strength and covenant requirements under clear regulatory definitions. However, Dabrowski noted that, while trustees have a legal duty to protect members’ benefits, many also see potential advantages in more flexible surplus rules provided strong safeguards are in place. “Even accounting for their legal duty to ensure the members of their schemes get the pensions they are promised, many pension managers now think there would be benefits, with the right controls, to permitting trustees and employers to put surplus funds to more productive use – for example by enhancing member benefits, DC contributions, or investing in growth,” he said.
“This is positive news for the government at a time when it is looking at unlocking surplus to invest in the UK economy.”
The Equiniti view
Luke Carter, Regulatory Consultant at Equiniti said, “The improved funding landscape has opened up meaningful opportunities for schemes to think more strategically about their endgame. With the right controls in place, surplus release could deliver real benefits, not just for scheme members through enhanced pensions, but also by supporting productive investment and wider economic growth. Industry will need clear guidance and strong regulation to ensure that these opportunities benefit members”.
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