Disputes Over Surplus Assets On The Rise
Disputes over defined benefit pension scheme surpluses are set to increase unless trustees and employers address uncertainty over ownership, risking increased costs and delayed endgame plans, according to Hymans Robertson.
Its Whose surplus is it anyway? paper warned that leaving difficult discussions until surplus decisions are required could make it harder to reach agreements.
DB schemes failing to resolve these questions in a timely manner risk creating disagreements over surplus allocation, which could delay endgame strategies, and increase costs and risks, the paper stated.
Hymans Robertson highlighted widely differing expectations around pension surplus allocation, creating a rising challenge for schemes as funding levels improve.
The consultancy argued that the key to unlocking any deadlock was for all parties to analyse the scheme’s surplus history to weigh up the relevant factors and create a stronger basis for conversations about surplus ownership.
Understanding the origin of a surplus is essential, as surplus history analysis can help establish the relative contribution of all the different factors that led to the surplus and provide an informed foundation for allocation discussions.
Schemes that understand their history will be better placed to address the issue.
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In June, the Department for Work and Pensions launched a consultation on draft regulations for DB surplus flexibilities introduced through the Pension Schemes Act 2026.
Martin Potter, Hymans Robertson partner and scheme actuary, said: “There are strong views on all sides when it comes to pension scheme surplus.”
“For some, the starting point is that all surplus belongs to the employer. For others, there are clear expectations that members should benefit.
“The challenge is that these positions are often formed before there has been any detailed discussion about how the surplus actually came about.”
Potter noted that, as more schemes find themselves in surplus, competing expectations about how those funds should be used is an increasingly important issue for trustees and employers.
Without engagement, there is a risk that expectations continue to diverge and become increasingly difficult to reconcile, he continued.
Potter believes trustees and employers should establish a clear, objective understanding of their scheme’s journey back to surplus before making decisions about how any excess assets might be used.
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Trustees and employers should look at factors such as employer contributions, investment returns and member experience over time to provide context to conversations about fairness and the appropriate use of surplus.
Understanding the origins of surplus is particularly important given the long period many schemes spent managing deficits, with employers contributing substantial sums and trustees overseeing funding recovery plans and risk reduction strategies, Potter said.
There may not be a mathematically ‘correct’ answer to the surplus-sharing question, but schemes that understand their history will be in a much stronger position to handle one of the most complex and contentious issues facing the DB pensions market today.
A surplus history analysis can help ensure decisions are informed by facts rather than competing narratives, Potter added.
As the Pension Schemes Act 2026 introduces new flexibilities for DB schemes, it’s essential for trustees and employers to address the uncertainty surrounding surplus ownership to avoid disputes and ensure a smooth endgame plan.
Trustees and employers must work together.
