UK Government to Allow Trustee Approval of Defined Benefit Pension Surplus Extraction

The UK government has unveiled a landmark policy allowing trustees of defined benefit (DB) pension schemes to approve the extraction of surplus funds, a move expected to unlock billions of pounds currently held in pension surpluses. This initiative aims to stimulate economic growth by enabling employers to reinvest surplus cash into their businesses or enhance member benefits, while maintaining strong safeguards to protect pension scheme members.

Unlocking Billions in DB Pension Surpluses

Defined benefit pension schemes in the UK collectively hold an estimated surplus of around £160 billion, measured on a low dependency basis, with approximately £100 billion on a buyout basis. These surpluses represent funds beyond what is required to meet current and future pension liabilities, held by nearly 5,000 private sector DB schemes covering 8.8 million members, including 4 million retirees.

The government’s new policy will permit trustees to modify scheme rules, where necessary, to allow surplus extraction with the agreement of sponsoring employers. This flexibility is designed to unlock capital that can be reinvested into core business activities or used to provide additional benefits to members, thereby supporting broader economic objectives such as productivity improvement and wage growth.

Government’s Rationale and Legislative Changes

Announced in early 2025 and set to be formalized in the forthcoming Pension Schemes Bill, the government’s approach reflects a strategic effort to mobilize pension surpluses as a source of productive finance for the UK economy. The key legislative change will empower trustees to approve surplus extraction even if existing scheme rules prohibit it, provided that:

• Trustees and sponsoring employers agree on the surplus release.
• Actuarial certification confirms that funding tests are met.
• Member benefits remain fully protected with a very high probability of being paid in full.

The government stresses that member security is paramount, and surplus extraction will only proceed under strict conditions ensuring pension promises are safeguarded.

Reactions from Industry and Stakeholders

Support from Regulators and Industry Experts

The Pensions Regulator (TPR) has welcomed the government’s plans, emphasizing that where schemes are fully funded and robust protections exist, releasing surplus funds can benefit members and the wider economy1. Nausicaa Delfas, TPR Chief Executive, highlighted the importance of trustee confidence and clear regulatory guidance in implementing these changes safely.

Alistair Russell-Smith of Spence & Partners described the proposals as a “seminal moment” for DB schemes, underscoring the need for trustees to have clear frameworks to balance member interests with economic benefits.

Concerns from Pension Scheme Members

Despite official endorsements, the policy has sparked apprehension among many DB pension members. A recent survey by Pension Insurance Corporation (PIC) revealed that 60% of DB members fear the government’s plans could jeopardize their retirement security. Moreover, 94% of respondents opposed political interference in their pensions, while expressing strong trust in their scheme trustees.

Tracy Blackwell, CEO of PIC, warned that the plans might reduce pension security for vulnerable and elderly members, urging policymakers to consider member voices carefully. PIC advocates that member benefits should be fully secured before employers access surplus funds, aligning all parties’ interests.

Calls for Robust Safeguards

Member-nominated trustee groups and pension experts have called for stringent safeguards to accompany surplus extraction. Maggie Rodger, co-chair of the Association of Member Nominated Trustees, emphasized that employers must remain committed to their pension obligations and that trustees should rigorously assess risks before approving surplus release.

Governance and Safeguards to Protect Members

The government intends to maintain strong governance standards requiring trustees to:

• Conduct thorough funding and risk assessments.
• Obtain actuarial certification confirming that member benefits are secure.
• Ensure that surplus extraction does not compromise the scheme’s ability to meet future obligations.

Additionally, the Pension Schemes Bill will include provisions for ongoing regulatory oversight and consultation with The Pensions Regulator to uphold member protections.

Economic Impact and Future Outlook

By unlocking pension surpluses, the government aims to channel billions into UK businesses and infrastructure projects, fostering economic growth and higher living standards. Chancellor announcements and the upcoming final report of the Pensions Investment Review, expected in spring 2025, will further shape the regulatory framework and investment landscape for DB schemes.

This policy marks a significant reform in pension regulation, balancing the unlocking of dormant capital with the fiduciary duty trustees owe to members. While it promises new investment opportunities, it also demands careful implementation to maintain the trust and security of millions of pension scheme members.