Government makes plans for DB scheme surplus extraction

The Government has confirmed in a press release that new rules will be introduced giving more flexibility to how occupational DB pension schemes are able to invest surplus funds.

In a speech in the City of London on January 29, 2025, Rachel Reeves announced plans to make legislative changes enabling DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement. The details are to be set out in the Government’s response, expected in the Spring, to the consultation conducted under the previous administration on Options for Defined Benefits and they are expected to allow employers to “invest these funds in their core business … and/or provide additional benefits to members of the pension scheme".

The Government is keen to free up funds for investment in the UK economy to boost growth. However, as trustees have an overarching fiduciary duty to act in the best interests of their members, they are expected to seek assurances from employers that members will also benefit before agreeing to any surplus extraction proposals.

Most industry bodies have welcomed the news and the Pensions Regulator issued a statement supporting the Government’s plans, with the caveat that protections for members must be put in place. The Regulator’s statement also includes some interesting data on DB scheme funding. It estimates that 49 per cent of schemes are now fully funded on a buyout basis, with more than 9 per cent of schemes being more than 140 per cent funded on the same basis.

The Government has estimated that DB schemes hold in aggregate more than £160bn in surplus funds when measured on a low dependency basis, equating to around £100bn on a buyout basis. The Government's focus on the £160bn figure suggests it holds the view that surpluses should be available for distribution before a DB scheme reaches full funding on a buy-out measure. This has the potential to increase significantly the appeal to sponsors of running-on pension schemes with the potential for earlier, and larger, access to surpluses.

In a subsequent speech, the Chancellor also confirmed that the final report on the Government’s first phase of its Pensions Investment Review will be published this Spring, with consultations on the measures included in the Interim Report now complete.