Five things you need to know about: releasing trapped pension surpluses

Posted on 19 March 2025 • Business, Society and politics

In a bid to fuel-inject the economy and provide opportunity for growth, the UK Government is intending to announce plans to make it easier to tap into the surplus funds lying in corporate pension schemes. Following an earlier heads-up about this intention, we can expect the Chancellor Rachel Reeves to reveal more in the coming weeks about unlocking this untapped capital to drive economic growth.  It’s estimated that there is anything from £7 billion to £207 billion of surplus wealth trapped inside these UK pension schemes.

The OU’s Senior Lecturer in Economics and Personal Finance Jonquil Lowe gives some answers on this emerging proposal:

 

1. Could this affect you?

You may belong to one of these pension schemes through your current or a previous employer.

However, not all workplace pension schemes are involved: only the type of pension schemes that work on a ‘defined-benefit’ basis. These are schemes that promise you a pension at retirement that is typically based on a specified fraction of your average earnings for each year you’ve been in the scheme. (For example, someone earning £30,000 with 10 years’ membership and a 1/60^th fraction would get £30,000 x 10 x 1/60 = £5,000 in pension.)

This is in contrast to defined-contribution schemes, ones where you simply build up your own pot of savings but don’t know exactly how much pension that will give you.

 

2. Where do the surpluses come from?

 

With a defined benefit scheme, it’s all about the pension scheme having enough assets to pay the pensions you and the rest of the members are promised.

If the assets outweigh the value of the pension promise, the scheme is in surplus. At present, most schemes have no way of removing the surplus from the scheme, hence the government’s proposal to make use of them to fund growth.

Defined-benefit schemes work by making sure they can pay the pension promises by investing the contributions you and your employer make into what’s called a pension fund.

Every now and again the value of the pension promises is compared against the value of the investments (those are the scheme’s assets) to make sure the scheme is still on track to make all the current and future pension payments.

Of course there is not always a surplus. If the assets are too low, the scheme is said to be ‘in deficit’ and the employer will have to top up the pension fund. Being in deficit doesn’t directly affect your pension – you should still get what you’re promised. But it might encourage your employer to close the scheme, as many employers have done in the past. And in the worst case, if your employer went bust and so couldn’t top up the scheme, your pension might be transferred to a protection scheme which would not usually pay the full pension you had been expecting.

 

3. Does the surplus belong to you?

 

The surplus does not belong to the scheme members. Although you will usually have contributed to the scheme, your employer will have paid in much more. Remember that what the scheme is promising you is not a share of the fund, rather a specified pension when you get to retirement, regardless of whether the scheme is in deficit or surplus.

 

4. How might the surplus be used?

 

Under the proposals, the surplus could be paid to your employer and the government has various suggestions about how it could be used. For example, it could be invested to grow the firm, or used to increase wages. Alternatively, surpluses could be used to boost the contributions going into any defined-contribution scheme your workplace offers – many of these schemes were set up to replace closed defined-benefit schemes and are seldom as generous.

 

5. Should I worry if my scheme pays out its surplus?

 

Valuing promised pensions is not an exact science because it relies on making assumptions and on the current level of interest rates. In the decade of low interest rates prior to 2022, many schemes were in deficit. Currently, interest rates are much higher which reduces the value of the future pension promises. This has led to many schemes now being in surplus.

However, as economic conditions change in future, deficits could re-emerge, especially if surpluses have been run down. So, it is important that pension schemes be allowed to estimate their surpluses on a very cautious basis, making sure that the promised pensions are secure. The UK’s drive for growth should not be allowed to jeopardise pension promises.