That question has changed rather quickly.
Funding positions across DB schemes have improved sharply since 2021 and the tone of the debate has shifted with it. We now find ourselves in a world where the discussion is not about deficit repair but about surplus and more awkwardly what should be done with it. The Government’s Pensions Reform Bill arrives right in the middle of this shift, at a point where the numbers look strong but the underlying picture is far from settled.
At a headline level things look positive. Aggregate funding levels on a Section 179 basis show a sizeable surplus and even on more conservative buy out measures the system appears broadly close to fully funded. Compared to where schemes were even five or six years ago this represents a remarkable turnaround. But it is worth being honest about what has driven it.
The improvement has not come from a sudden wave of better governance or clever investment strategy. It has come largely from higher gilt yields. That matters because it means the surplus we now talk about is highly sensitive to market conditions. A relatively small move in yields or changes in longevity assumptions can wipe out a large chunk of what currently looks like headroom. Trustees know this even if the policy debate sometimes glosses over it.
This creates a problem. Policy is starting to treat surplus as if it is a stable and dependable feature of the system when in reality for many schemes it is still fragile and reversible. For trustees the surplus often feels less like spare cash and more like a safety buffer. Something that protects members against future shocks and reduces reliance on sponsor support over time. Giving that up is not a neutral decision.
The Reform Bill proposes giving trustees more flexibility to allow surplus to be paid back to sponsors provided certain conditions are met and an actuary signs off that it is safe to do so. On paper this preserves trustee discretion. In practice it puts trustees in a very uncomfortable position.
For years trustee decision making has taken place in a deficit environment where interests were broadly aligned. Sponsors wanted deficits reduced. Members wanted security. Regulators wanted risk taken out of the system. In a surplus world those interests start to pull in different directions. Sponsors may want access to capital. Government wants investment and growth. Trustees remain focused on benefit security and downside risk. Someone has to say yes or no and increasingly that someone is the trustee board.
In effect trustees are being asked to act as gatekeepers for a wider economic policy agenda. That is not a role most schemes were designed for and many do not have the scale or governance firepower to carry it comfortably.
A lot of the political focus has been on the idea that DB surpluses are trapped and could be put to better use in the economy. That framing is a bit misleading. Surpluses are not sitting in cash doing nothing. They are invested alongside the rest of scheme assets to support liabilities. The real question is not whether surplus is invested but how it is invested.
There has been a very clear shift over the last two decades away from equities and into bonds. Some see this as excessive caution or a missed opportunity to support growth. But for most schemes it reflects reality. The majority of DB schemes are closed, mature and cash flow negative. Members are drawing pensions now or will be soon. In that context a higher allocation to bonds with more predictable cash flows is not irrational. It is arguably exactly what these schemes exist to do.
Expecting mature DB schemes to suddenly behave like long term growth investors may be asking them to ignore their own risk profile. Without consolidation or a fundamental change in structure it is hard to see how surplus release alone changes that picture in any meaningful way.
Even where surplus is released the outcome is uncertain. Some sponsors may reinvest in their businesses. Others may reduce debt or return money to shareholders. None of this is necessarily bad but it does weaken the link between pension reform and productive investment that is often implied.
There is also an uncomfortable distributional question in the background. DB surpluses exist in a system that is largely closed while most workers now rely on defined contribution pensions that remain inadequate for many. The optics of releasing DB surplus sit awkwardly alongside that reality, particularly if members do not see any direct benefit themselves.
The UK DB system has clearly entered a new phase. But surplus does not mean the end of risk. It simply changes where the risk sits and who is asked to take responsibility for it. Trustees are being given more power but also more pressure. Government wants growth but DB schemes may not be the right tool to deliver it.
Reform in this area is not really about unlocking money. It is about deciding how much uncertainty we are prepared to accept and who bears the consequences if today’s surplus turns out not to be as permanent as it looks. That is a harder and more human question than the numbers alone suggest.
