Surplus extraction from defined benefit (DB) pension schemes is likely to fall short of sector expectations, despite improving funding levels across the market, according to a report from the Pensions Policy Institute (PPI).

The report, Unlocking DB surpluses: Balancing Risks and Rewards, found that while many private DB schemes are now in surplus, the amount that could realistically be released is likely to be smaller than headline estimates suggest because of funding risks, scheme-specific rules and differing endgame strategies.

The research, sponsored by Standard Life, the Association of British Insurers (ABI), Aptia and Pensions UK, comes after the Pension Schemes Act 2026 introduced measures designed to make surplus extraction easier for schemes.

However, the report warned that access to surplus remains heavily dependent on trustee discretion, fiduciary duties and scheme funding resilience.

According to the report, many schemes continue to target insurance buyout as their preferred endgame strategy, meaning surplus assets may need to be retained to meet insurer pricing requirements and ensure transaction readiness.

The PPI also highlighted that funding positions vary significantly depending on how liabilities are measured.

While Section 179 and technical provisions measures indicate widespread surpluses, the aggregate funding ratio on a full buyout basis was around 95.8 per cent, with a substantial minority of schemes remaining materially underfunded on this basis.

The report further warned that the sustainability of surpluses depends heavily on investment strategy, scheme maturity and covenant strength.

PPI modelling found that run-on schemes closed to new entrants 10 years ago and closed to future accruals faced a 26 per cent risk of falling back into deficit over a 25-year period, even with a 120 per cent starting funding ratio on a technical provisions basis, if no remedial action was taken.

Meanwhile, the report noted that DB surpluses had largely been driven by higher long-term interest rates, which reduced the present value of liabilities, alongside strong asset performance, moderated longevity assumptions, and historic sponsor contributions.

PPI policy researcher and lead author, Shantel Okello, said expectations around widespread surplus across the private DB market “may not fully reflect the realities of extraction”.

“Our modelling has identified significant variations of funding resilience and investment risk, with endgame strategies for individual schemes and differences in liability measurement also critical to understanding the true scale and accessibility of surplus extraction,” she stated.

Echoing this, Standard Life managing director for pension risk transfer and individual retirement, Claire Altman, warned that the report showed that “a surplus on paper does not necessarily translate into guaranteed member outcomes”.

“What matters is how resilient that surplus is under stress and how it fits with a scheme’s long-term endgame,” she continued.

Altman also argued that insurer buy-in and buyout solutions continued to provide “a clear and established route to long-term certainty for pension members”.

ABI head of long-term savings policy, Rob Yuille, stressed that the “core purpose” of any DB scheme is to pay members their promised pension in full.

“As this report highlights, extracting a surplus - even from a well-funded scheme - significantly increases the probability that it will go into deficit in future, potentially to an extreme level,” he warned.

Meanwhile, Pensions UK head of DB, local government pension scheme (LGPS) and investment, Tiffany Tsang, said the new powers to unlock DB surplus would give schemes and employers “the flexibility to put well-earned surpluses to productive use”.

However, she acknowledged that decisions around surplus extraction would “often be finely balanced and always require close scrutiny”.

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