Trustees urged to clarify DB surplus ownership amid new rules

Trustees and sponsoring employers should discuss the use of defined benefit (DB) surplus capital, according to a report by Hymans Robertson. The consultancy urged stakeholders to clarify surplus ownership ahead of new rules from the Department for Work and Pensions (DWP), emphasizing the need for proactive engagement to ensure excess capital is utilized effectively.

The DWP is consulting on powers for trustees to release surplus from overfunded DB schemes, with the consultation closing next month. Hymans Robertson recommended that trustees review their scheme’s funding history, membership, contributions, and key events like closures, as well as sources of returns and covenant commitments. This detailed analysis can provide a factual foundation for surplus discussions by attributing funding elements to responsible parties.

Surplus ownership debate

Hymans Robertson noted that many schemes carry “long memories and scars” from 25 years of deficit recovery disputes. “Many schemes have long memories and scars from 25 years of arguing about deficit recovery plans,” the consultancy said in its report. “Giving these their proper context helps narrow the differences in expectations about today’s surpluses.” The report, titled Whose surplus is it anyway?, highlighted that understanding historical context is key for aligning expectations and supporting productive conversations.

The consultancy emphasized analyzing data only from the last surplus period, as older information may not reflect current surplus origins. “Every scheme has its own history, and the analysis shows how much the ‘balance of cost’ was for the employer,” Hymans Robertson stated. It acknowledged that no mathematically correct answer exists for surplus allocation, advising trustees to seek legal counsel and aim for pragmatic agreements with employers. The outcome may require a commercial compromise to balance the interests of all parties involved.

Increased focus on DB schemes

The report aligns with findings from the Independent Governance Group (IGG), which showed that 40% of executives view well-funded DB schemes as a future value source. Success depends on strong governance, effective sponsor-trustee collaboration, and access to the right expertise. IGG found that 81% of respondents reported increased board time on pension discussions in the past five years, with 37% noting a significant rise, reflecting the growing importance of pension schemes in strategic decision-making.