The Department for Work and Pensions’ proposals to introduce greater flexibility for trustees to extract surplus from defined benefit (DB) schemes seek to “unlock value for both employers and scheme members”. However, is accessing surplus the best way to do it?

The government’s estimation that £160bn exists in surpluses at the low dependency threshold is a stark contrast to the £11.2bn that it expects to be released over a 10-year period.

Why the contrast? DB trustees have a responsibility to their members (and, ultimately, to their scheme rules) and will remain liable for any decisions they make up to their endgame buyout.

This means there is a lot on the line for trustees. Would trustees be right to be risk-averse about surplus? According to the Pensions Policy Institute’s research, this decision is not to be taken lightly, with the risk of falling below full funding increasing dramatically when surplus is extracted: reducing funding from 120 per cent to 105 per cent increased the probability of a scheme falling below full funding from 26 per cent to 70 per cent over a 25-year period.

These losses could be exacerbated when considered against increasing levels of financial pressure on businesses.

The shocks which create deficits could also damage an employer’s finances, making the requirement to top up the pension scheme’s shortfall even more burdensome, potentially undoing the short-term gains of surplus extraction for both employers and scheme members.

---