Trustees face challenges with scheme surpluses

According to Independent Governance Group’s Louise Davey, defined benefit scheme surpluses represent a complex and fragile state. Although many schemes show high funding, trustees face a more detailed situation: surplus is conditional, dependent on assumptions and market swings, and frequently hard to actually use.

The backdrop to this debate is a broader policy shift, as funding positions improve and policymakers explore whether surplus can play a more active role in driving growth, while also delivering for members. Sponsors have started to raise their own questions about accessing this capital, which has long been locked away or simply non-existent.

Surplus Governance

Greater flexibility hardly removes the need for caution, as a surplus opens up a whole new world of possibilities. The focus for trustees is no longer solely on closing deficits and securing benefits, but on governing potential surplus under uncertainty, requiring a different mindset.

Surplus is not ‘spare’ capital, but a by-product of a funding and investment strategy that must continue to deliver resilience over time. Trustees must factor in the origin of the surplus, its deployment, and the state of the scheme, including the number of members left to collect benefits.

Challenges and Opportunities

It is essential to remember that surplus can and does disappear, even in well-funded schemes, if capital is extracted prematurely. An analysis that integrates funding, investment, and covenant considerations is required to ensure members’ benefits remain secure. This analysis must be forward-looking and consider various factors.

The core challenge is fiduciary, as trustees must balance competing and conflicting interests, including sponsors’ desire to access capital, member expectations of benefit improvement, and the need to maintain sufficient buffers to secure member benefits against future downside risk.

Trustee Decision-Making

Professional trusteeship has a distinct contribution to make, with strong governance, disciplined decision-making, and independence in negotiations essential for using surplus appropriately. As expectations rise, the quality of trustee decision-making will increasingly determine whether and how surplus can be accessed.

According to Louise Davey, “A large surplus is a blessing, but trustees will be harshly judged on how well they capitalise on this once-in-a-generation opportunity. It’s on us to prove we’re up to the challenge.”

Decisions on surplus will be heavily scrutinised from all angles, and those in the pension sector will need to be ready with answers, justifying decisions with evidence of long-term planning and working together to establish best practice in uncharted territory.

With good governance and robust decision-making, surplus can fulfil its potential, but trustees must do so from a position of strength, supported by clear evidence and a relentless focus on optimising the value derived from this capital, assessing options beyond an insurance buyout.