UK defined benefit (DB) pension schemes are recording record surpluses, with average funding levels rising to 105 per cent, according to Aon’s latest analysis.

The consultancy’s 19th annual In Depth Review, covering 136 valuations completed up to July 2025, found that nearly two-thirds (65 per cent) of schemes were in surplus, while around half are now fully funded on a buy-out basis.

This marks a significant turnaround from three years ago, when 58 per cent of schemes still required recovery plans.

That figure has since fallen to 35 per cent, with the average recovery period reduced to 3.9 years.

The proportion of recovery plans assuming additional investment returns above the discount rate has also dropped sharply, from 66 per cent to 26 per cent.

Against this backdrop, trustees and sponsors are increasingly focused on endgame planning under the new DB Funding Code.

Of schemes with a long-term funding target, 51 per cent set this on a low dependency basis and 49 per cent on buy-out.

Once targets are reached, 54 per cent intend to secure benefits through buy-out, 29 per cent plan to run on, and 17 per cent remain undecided.

Aon associate partner, Emma Moore, said this shift is likely to accelerate as the new funding regime takes effect.

“We are seeing more schemes frame their long-term strategy around some form of low dependency basis, even where buy-out is anticipated,” she explained, adding that this offers flexibility and avoids potential accounting issues.

Moore also suggested that with the Code requiring technical provisions to converge with a low dependency basis, the use of split pre- and post-retirement discount rates - still applied by one in five schemes - may decline.

Meanwhile, the analysis also highlighted a strengthening of risk management practices.

Around 74 per cent of schemes commissioned third-party covenant assessments, while more than 90 per cent hedged at least 70 per cent of both interest rate and inflation risks, compared with 84 and 85 per cent respectively three years earlier.

Life expectancy assumptions have shortened by 0.4 years since the last valuation cycle, while the average assumed difference between RPI and CPI after 2030 has narrowed to just 0.1 per cent.

Aon noted that the stronger funding environment coincides with legislative changes that could reshape DB strategy.

The government’s Pension Schemes Bill proposes measures to allow trustees to return surplus funds to employers, subject to strict safeguards, actuarial certification and member notification.

The aim, Aon said, is to make it more attractive for schemes to run on, invest in productive assets, and generate surpluses that can potentially be shared with members and sponsors.

However, the Association of Professional Pension Trustees (APPT) has urged the government to put surplus management “at the heart” of reforms, warning that flexibility must be balanced with robust protections for savers.

Other industry voices have echoed these concerns, emphasising the need to reduce risk for savers.

Government explanatory notes confirm that surplus sharing must not compromise members’ interests and will remain subject to tight conditions.

Looking ahead, Aon said that as schemes reach unprecedented funding levels, trustees and sponsors are now facing strategic decisions once considered "distant".

Potential developments such as using DB surplus to fund ongoing defined contribution (DC) contributions, capital-backed solutions, and insurance transactions reinsured back to a sponsor’s own captive insurer may further expand the endgame options available, the firm added.

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