DB Schemes Lack Surplus Plans as Low Dependency Grows

New data from Independent Governance Group (IGG), a leading provider of professional pensions trusteeship, governance and communications services, suggests UK defined benefit (DB) schemes are moving beyond buyout as the default endgame, but many have yet to put in place the governance needed to deal with future surplus.

The less committed approach of low dependency is most common, with around 43% of schemes pursuing it, compared with 22% running on and just over a third (35%) targeting buyout. The key message is that trustees are considering a broader range of endgame options rather than treating buyout as the default.

This shift comes against a wider backdrop of continued DB market scale. TPR’s recent DB universe projection model suggests that, even with substantial buyout activity over the next decade, the sector could still hold around £0.6tn–£0.7tn of assets in 2035.

At the same time, planning for surplus has not kept pace with improving funding positions. Almost two-thirds of responding schemes (64%) have yet to decide how they would approach generating surplus once they reach their long-term funding objective. And while surplus is becoming a more realistic prospect, relatively few have translated that into a clear policy framework – only 17% have a clear plan for sharing future surplus, while 14% have a partial or unclear plan and 69% have no plan at all.

Taken together, the findings suggest that as funding improves and surplus becomes more achievable, the key challenge for schemes is increasingly one of governance rather than funding alone. As long-term options broaden, trustees and sponsors are likely to need clearer frameworks around long-term objectives, surplus triggers, risk buffers, potential uses of surplus and decision-making.

Tim Giles, Trustee Director at IGG, commented:

“The data reflects a market that is still working through a range of possible endgame outcomes on the back of a radically different funding environment. Low dependency is clearly the most popular option, but there is also clear shift towards schemes keeping their options open to consider what will deliver the best outcome for stakeholders. And while running and deploying a surplus is becoming more popular again, for many schemes, it is almost unchartered waters – the practical and governance questions around surplus are still relatively new.

“As funding levels improve, and governance capability develops alongside them, schemes are gaining access to options that may not previously have been available. The challenge is increasingly about having the right frameworks in place to navigate that wider range of endgame paths – with clear objectives, agreed decision-making and a shared understanding between trustees and sponsors of what different outcomes could involve. Schemes that have done more of that groundwork are likely to be better placed to respond in a measured way as their position evolves, for the benefit of both members and sponsors.”

Methodology:  The survey findings are drawn from responses from 133 schemes, representing 41% of relevant IGG schemes by number and around 35% by assets. Master Trusts and schemes identified as out of scope were excluded.

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