How to best utilise your DB pension scheme’s surplus assets?

Your defined benefit (DB) pension scheme has surplus funds – a good problem to have, right?! Increasingly UK pension scheme trustees and employers are facing a new issue to address – what to do with any surplus assets?

In light of this, more trustees and sponsors are discussing the alternative uses for the surplus assets and how they can benefit members and employers.

Where UK schemes have agreed to run on, or buyout in the longer term, surplus might be used to cover ongoing DB accrual costs, scheme expenses or possibly paying defined contribution scheme contributions. One-off discretionary pension increases can also help pensioner members, but they increase pension scheme liabilities and may negatively affect company accounts. Also, what's the benefit for non-pensioner members?

Trustees and employers should challenge themselves to think outside the box. In this article, we consider how using some of the surplus to enhance member support can benefit members, trustees and employers.

Improving member support

Financial wellbeing is important, and the desire for support is strong with members increasingly finding it difficult to navigate a path through the complex pensions landscape. 54% of employees think that financial tools and education should be a core part of their employee benefits. With the focus on DB scheme governance at an all-time high following the introduction of the General Code, schemes need to think about how they communicate with and support members.

Online education is not just a ‘nice to have’ anymore

Pensions are complex and a retirement decision is a once in a lifetime event. Members expect to be able to scroll through their scheme’s website and apps to understand their benefits and the choices they need to make. Pensions Dashboards will only increase this need. Providing support and information online also helps reduce administration enquiries, lowering costs.

Retirement guidance takes things an important step further

Seminars and webinars help members to understand their whole journey. Providing one-to-one guidance calls mean a member can ring up and talk through their options. This helps them be better equipped to make their decisions.

Retirement advice

Advice via a financial adviser takes the final step and provides a formal recommendation at retirement tailored to the member’s personal circumstances. This advice can be eye-wateringly expensive to get on the high street (up to £10,000+ for a member with a DB pension). For many members that’s just too much. Employers and schemes can put in place an adviser for a more affordable rate to help all members with their retirement decisions.

Widening the surplus distribution?

“Traditionally” distributing surplus to members has involved an immediate discretionary increase for pensioners, which excludes non-pensioner members.

Expanding the use of surplus by applying some funds to enhance member support, arguably provides a more equitable surplus distribution and addresses a clear need from non-pensioner members. The cost of providing this support is normally materially lower than providing additional pension and it doesn’t involve unwelcome liability increases.

Therefore, where schemes are considering potential uses of surplus, whether this is discretionary increases, accrual costs, or expenses, we encourage trustees and sponsors to consider directing some of the surplus funds towards meeting the cost of additional member support. A small additional expense allowance for this, relative to some meaningful surplus numbers, can go a significant way in ensuring better member outcomes.

Getting the right plan in place

Members need help now. The sooner support is put in place, the more members can be helped through one of the most important financial decisions of their life. Whatever your scheme’s future journey, we recommend getting a member experience and support plan in place now.

Footnotes

1. “2024 Global Benefits Attitudes Survey.” Return to article
2. “Emerging Trends in Defined Benefit Pensions Survey 2023.” Return to article