Trustees and sponsoring employers should engage in talks over the use of defined benefit (DB) surplus soon to ensure clarity over how excess capital can be used, according to Hymans Robertson.
The consultancy has urged stakeholders to discuss options and views for how surplus can be used ahead of expected new rules from the Department for Work and Pensions (DWP). The DWP is consulting on new powers for trustees to release surplus from overfunded DB schemes, with the consultation closing next month.
In a new report, Hymans Robertson recommended that trustees review the history of their scheme’s funding position, membership, contributions, and sources of returns, as well as other key events such as scheme closures and covenant commitments.
This information can help inform discussions over surplus by clarifying which parties were responsible for what elements of funding – creating a factual base for discussion of surplus ‘ownership’.
“Many schemes have long memories and scars from 25 years of arguing about deficit recovery plans. Giving these their proper context helps narrow the differences in expectations about today’s surpluses.”
From Hymans Robertson’s ‘Whose surplus is it anyway?’ report
“Every scheme has its own history, and the analysis shows how much the ‘balance of cost’ was for the employer,” Hymans Robertson stated. It emphasised that such an analysis should only go back to when the scheme was previously in surplus, as older data “won’t give you the story of how today’s surplus came about”.
“Many schemes have long memories and scars from 25 years of arguing about deficit recovery plans,” the consultancy said in its report. “Giving these their proper context helps narrow the differences in expectations about today’s surpluses.”
It added that there was unlikely to be a “mathematically or actuarially ‘correct’ answer to allocating surplus”, so trustees should seek legal advice and be aware that “the outcome may need to be a commercial and pragmatic agreement between the trustees and employer”.
The report coincides with research from professional trustee firm Independent Governance Group (IGG), which found that boards and senior company leaders are spending more time talking about their pension schemes now that they are in surplus.
“Sponsors and trustees now have a wider range of credible options available to them, but that makes decision-making more complex. Success depends on strong governance, effective sponsor-trustee collaboration, and access to the right expertise.”
Two in five (40%) of 100 executives and pension decision makers said they considered a well-funded DB scheme to be a “potential source of future value”, IGG said.
IGG reported that 81% of respondents said the amount of board or executive time spent discussing pension schemes had increased in the past five years, coinciding with significant improvements in funding levels for many DB schemes. More than a third (37%) said time spent on pensions had increased significantly in this period.
David Farmer, trustee director and head of strategic pension solutions at IGG, said improved funding positions had “expanded the number of strategic options available to sponsors, but it has also created more difficult decisions”.
He continued: “For years, the challenge for many chief financial officers was relatively easy to define, even if it was difficult to solve: fund the deficit, manage risk and work towards a long-term objective. Improved funding has changed that equation, and buyout as soon as possible is no longer the default option.
“Sponsors and trustees now have a wider range of credible options available to them, but that makes decision-making more complex rather than less. Success increasingly depends on strong governance, effective sponsor-trustee collaboration, and access to the right expertise.”
