The number of defined benefit (DB) schemes granting discretionary pension increases has fallen, with research from Aon revealing that the majority (83 per cent) of DB schemes are yet to decide how to share any surplus between the sponsor and member.

Aon’s 2025 Discretionary Pension Increase survey, covering more than 200 UK defined benefit (DB) schemes, found that just 13 per cent granted a discretionary increase in 2024, down from 17 per cent in 2023.

The consultancy attributed the decline to the “more benign” inflationary environment seen over the past 18 months.

Scheme funding level was also found to have a “considerable influence” on decisions, as all schemes that granted a discretionary increase were fully funded on a technical provisions basis, while 58 per cent of those granting a discretionary increase in 2024 were fully funded on a solvency basis.

Aon associate partner and head of member distributions, Nick Coates, suggested that endgame plans were another key factor, pointing out that schemes intending to run on are more likely to grant discretionary increases, "which is not a surprise".

Indeed, among schemes that did award a discretionary increase in 2024 and had an endgame in mind, 61 per cent said they were intending to run on rather than insure at the earliest opportunity.

“However, if it significantly delays the timeline for their endgame or if there are concerns over sponsor covenant, those looking to insure might now be less likely to grant a discretionary increase," Coates added.

Concerns over a lack of discretionary increases have grown in recent years, particularly given the inflationary environment, withwider evidence that most DB schemes provide below-inflation indexation, typically capped at 5 per cent for post-1997 benefits.

But Aon found that the proportion of schemes granting discretionary increases is set to fall further, as just 12 per cent of schemes said they were likely to grant a discretionary increase in 2025.

Changes to DB surplus rules are expected to help, as Coates said that "in the future we expect to see more schemes considering these increases, driven by better funding positions and the greater flexibility to release surplus, as outlined in the bill.

Indeed, during the bill's second reading, Pensions Minister, Torsten Bell, argued that the proposed DB surplus rule changes could help address discretionary increase concerns, encouraging schemes to prioritise indexation for those with pre-1997 accruals.

He noted that while employers may need to agree to discretionary increases under scheme rules, trustees were “perfectly within their rights” to request this as part of a surplus release agreement, emphasising that "trustees are in the driving seat”.

Separate analysis from LCP suggested momentum was already building, with over half of DB schemes considering sharing surplus funds, rising to two-thirds of those over £1bn and 80 per cent of schemes above £5bn.

However, Coates stressed the need for schemes to take action sooner, warning that "simply retaining the surplus and building up more could lead to significant intergenerational unfairness among members".

“If discretionary benefits are only awarded 10 years down the line, it will only be those still alive who can benefit – so the timing of the surplus release is important,” he stated.

Coates also pointed out that The Pensions Regulator's recent endgame guidance also emphasised the need for schemes running on to agree a policy of surplus distribution.

However, he stressed that "much more work is needed in this area", with Aon's survey revealing that 83 per cent of schemes yet to form a policy for sharing surplus between members and the sponsor.

And there could be alternatives to explore, as Coates explained that whilst the most common method of releasing surplus remains one-off ‘pre-1997’ discretionary increases, trustees are beginning to explore alternatives, such as funding independent financial advice for members.

He also said that there is scope for government to make it easier for schemes to award discretionary benefits, suggesting that enabling schemes to grant one-off cash lump sums from surplus as an authorised payment would be a “good alternative” to awarding a pension increase.

He stated: “There are ways to navigate through the moral and current tax issues of awarding a discretionary benefit, but many trustees aiming to insure plans rather than run-on might prefer to avoid some of the complex decisions around utilising surplus simply by insuring before a surplus has emerged.

“Schemes may need to justify whether and how they apply discretionary increases or distribute surplus.

"Either way, it’s increasingly apparent that trustee boards and sponsors must clearly define decision-making responsibilities and engage in strategic planning around surplus use and equitable sharing.”

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