Hello surplus my old friend? We’ve come to talk about you again…

Nearly a year after speaking at the LawDeb debate on the topic of whether DB surpluses should be returned to employers, the issue of surplus is attracting more attention than it has done since the 1980s.

The DWP’s consultation on Options for Defined Benefit schemes issued in March 2024 has a section on the treatment of surplus, including commentary around removing both the practical barriers around surplus extraction in scheme rules and removing “behavioural barriers by bringing surplus extraction in line with trustee duties”. What on earth does that mean? It also talks of making it easier to share “scheme surplus with employer and scheme members”.

So, there are two questions:

  • can you take the surplus out, and
  • should you take the surplus out of the scheme and/or spend it on members’ benefits?

What factors need to be considered and when? Covenant and members’ benefit security, of course, but is it time for trustees and employers to start talking about surplus in the context of journey plans and whether the destination or road map may need changing?

Not since the 1980s, when ra-ra skirts were all the rage, have DB schemes had permanent surpluses. The tenor and tone of the pensions landscape has certainly changed in a way that few of us could have imagined in the last 12 months.

The DWP consultation asks about introducing a statutory override power to allow DB schemes to potentially refund surplus to employers or a power to amend scheme rules to allow surplus refunds.

To run on or run off?

The wider discussion in the pensions industry is increasingly focused on the debate closed DB schemes may have on the decision between run on or run off (buy-out, DB superfund or DB consolidator). Is running on an option to create a surplus? Or should trustees just finish what they started and buy-out if possible? What a lovely discussion to have.

The cut in the tax rate on a refund of surplus from 35% to 25% from 6 April 2024 is the first step on the road to making running a scheme on and building a surplus more attractive.

The tone of Government policy is also changing with the Chancellor talking about long term growth, productive finance and the investment practices of DB schemes in budgets and statements over the last 12 months. The pensions minister has also been saying the Government does not want to unduly regulate funding if it means that there is a real risk aversion approach being taken by trustees. The feeling is one of looking for those sunny uplands where surpluses are regularly generated and invested back into UK plc.

The discussion about surplus can only bring trustees and employers closer in having a real dialogue about the strength of the covenant, the long-term plan for the scheme and the risks of moving to a buy-out versus the risks of running on.

The Sound of Silence lyrics are about the inability of people to truly communicate with others. The opening lines “Hello darkness, my old friend/I’ve come to talk with you again” set the tone for a rather introspective and contemplative song but we think recasting it as “Hello surplus, my old friend we’ve come to talk about you again” can be the opening of a new dialogue between trustees and employers, in an exciting and interesting time in pensions.

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