Surplus disputes risk increased costs and delayed endgame plans

Disputes over DB scheme surpluses are set to grow unless employers and trustees address questions over ownership, claims Hymans Robertson. In its latest paper, 'Whose surplus is it anyway?', the firm argues that leaving difficult conversations until surplus decisions are needed could make agreement harder to reach. If schemes fail to resolve this now, disagreements over surplus allocation could delay endgame plans, increase costs and risks. It warns there are widely differing expectations around pension surplus allocation. This is creating a growing challenge for schemes as funding levels improve. The firm believes that key to unlocking any deadlock is for all parties to analyse the scheme’s surplus history. In doing this they can weigh up all relevant factors, to create a stronger basis for discussions about surplus ownership.

The leading pensions and financial services consultancy argues that understanding the origins of a surplus is crucial. Many schemes spent decades managing deficits, with trustees overseeing recovery plans and risk reduction strategies. Surplus history analysis can help establish the relative contribution of all the different factors and provide an informed basis for discussions about surplus allocation.

While there may not be a single answer to the surplus-sharing question, schemes that understand their history will be better placed to navigate one of the most complex and contentious issues currently facing the defined benefit pensions market.

Commenting on surplus allocation, Martin Potter, Partner and Scheme Actuary, Hymans Robertson, said:

“There are strong views on all sides when it comes to pension scheme surplus. For some, the starting point is that all surplus belongs to the employer. For others, there are clear expectations that members should benefit. The challenge is that these positions are often formed before there has been any detailed discussion about how the surplus actually came about.

“As more schemes find themselves in surplus, competing expectations about how those funds should be used is an increasingly important issue for trustees and employers. Without engagement, there is a risk that expectations continue to diverge and become increasingly difficult to reconcile. That's why we believe trustees and employers should establish a clear, objective understanding of their scheme's journey back to surplus before making decisions about how any excess assets might be used.

“Surplus history analysis helps schemes move beyond assumptions and focus on evidence. Looking at factors such as employer contributions, investment returns and member experience over time provides valuable context for discussions about fairness and the appropriate use of surplus. Understanding the origins of surplus is particularly important given the long period many schemes spent managing deficits, with employers contributing substantial sums and trustees overseeing funding recovery plans and risk reduction strategies.

“There may not be a mathematically ‘correct’ answer to the surplus-sharing question, but schemes that understand their history will be in a much stronger position to navigate one of the most complex and contentious issues facing the defined benefit pensions market today. A surplus history analysis can help ensure decisions are informed by facts rather than competing narratives.”

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