Majority of schemes now in surplus
New analysis from Aon and XPS highlights the dramatic improvement in DB funding levels over the past three years. Nearly two-thirds of schemes are currently in surplus, with average funding levels reaching 105% on a technical provisions basis (according to Aon) and 122% relative to long-term targets (according to XPS). A growing number of schemes are fully funded on a buy-out basis, reducing the need for recovery plans. Just 35% of schemes now require such plans, with average recovery periods falling to under four years. This shift reflects not only favourable market conditions, but also more sophisticated risk management and governance across the sector.
Shifting mortality assumptions may affect funding
For the first time since the pandemic, life expectancy has increased slightly. The latest CMI 2025 model shows modest improvements in mortality, particularly among older age groups, contributing to funding gains. However, younger working-age adults continue to face higher mortality than before COVID-19. If adopted, the new model could increase scheme liabilities by around 1%, depending on the membership profile. While this may slightly reduce surpluses, many schemes are well-placed to absorb the impact. Even so, advisers recommend trustees carefully tailor their assumptions based on the age, sex and socio-economic characteristics of their members.
Endgame strategies continue to evolve
With funding levels at historic highs, endgame planning is firmly in focus for trustees and sponsors. Just over half of schemes now target buy-out, while others are pursuing low-dependency strategies or preparing for run-on models. Improved funding positions, stronger risk hedging and clearer covenant assessments have enabled many schemes to accelerate their journey to endgame.
Alongside traditional insurance-led options, schemes are exploring more flexible solutions. Surplus-sharing arrangements are becoming more popular, especially in cases where sponsors are looking to share in surplus returns while maintaining member protections. Capital-backed journey plans, used to support lower-risk investment strategies, are also gaining traction, while reinsured buy-ins and synthetic bulk annuities offer additional tools for managing longevity risk.
Choosing the right approach depends on multiple factors, including scheme maturity, membership profile, sponsor strength and time horizon. Trustees are therefore advised to keep strategies under regular review and ensure that endgame decisions align with broader objectives for member security and funding resilience.
Regulatory changes may reshape surplus use
The forthcoming Pension Schemes Bill could mark a significant policy shift. One proposal under consideration would allow DB scheme surpluses to be returned to sponsoring employers, provided appropriate safeguards are in place. This could make surplus management more attractive for corporate sponsors and encourage more schemes to run on, unlocking opportunities to invest in productive UK assets that support economic growth. Schemes weighing this option will need to consider the trade-offs. Releasing surplus to the employer may align with wider corporate aims but must be balanced against the long-term interests of members. Advisers urge trustees to stay engaged as legislation develops and prepare for multiple outcomes.
Buy-out pricing and mortality assumptions under scrutiny
Some insurers are already pricing in the latest mortality improvements, especially among pensioner populations. This has the potential to increase buy-out costs, depending on how scheme assumptions compare with those used in the market. Trustees considering buy-out are advised to revisit pricing assumptions, assess the impact of insurer trends and stress-test transaction timing. Decisions based on outdated models or incomplete data could reduce the overall value of a well-funded position.
Caution warranted despite healthy funding levels
While the overall picture is encouraging, both Aon and XPS caution against complacency. Trustees are encouraged to treat current surpluses as a foundation for decision-making, not a signal to accelerate unnecessarily. Careful planning remains essential. Schemes should revisit covenant assessments, review mortality and funding assumptions, and model a range of outcomes. Strong funding creates opportunity but capturing that opportunity requires discipline and sound judgement.
Luke Carter, Regulatory Consultant at Equiniti said, “After years of volatility, it’s a welcome shift to see so many schemes in surplus. But funding is only one part of the picture. Trustees today face a different kind of challenge – making decisions that lock in security while keeping options open. That takes robust data, thoughtful modelling and a clear-eyed view of the future.”