Defined benefit (DB) pension schemes focusing on insurance buyout are being called by Hymans Robertson to be more proactive to avoid the risk of trapped surplus.

The consultancy said that improved funding levels, following on from an unprecedented rise in yields, present an opportunity for DB schemes. However, it added that many do not have appropriate plans in place to ensure efficient use of any emerging surplus, which leads to “trapped surplus”.

Hymans Robertson said there is a number of “key areas” that should be reviewed and could be utilised to remove trapped surplus risk.

These include escrow arrangements, contribution mechanisms and the funding of future service contributions.

The Department for Work and Penions (DWP) consultation on DB pension scheme surpluses could further bring significant change that benefits both members and employers, Hymans Robertson said.

However, it added that It’s likely that any changes will take time to implement, which highlights the importance of employer proactivity to ensure they have maximum flexibility. For employers with a 2024 valuation approaching, this presents a natural opportunity to address these key areas with their trustees, the consultancy said.

Sachin Patel, senior actuarial consultant at Hymans Robertson, said that in isolation, improved funding levels are great news for DB pension schemes and even better news for members.

However, he said that with many sponsoring employers having paid deficit contributions for years, they may not have the appropriate plans in place to take advantage of a surprise emerging surplus.

For those schemes where the employer’s long-term objective is to target a run-on strategy, the idea of trapped surplus is less likely to be an issue. However, he pointed out that for those targeting an insurance buy-out, and are reasonably close to reaching this, a 2024 valuation discussion is a welcome moment of reflection, particularly when viewed in tandem with the potential forthcoming legislative changes signposted by the DWP.

He said: “We would urge employers with DB schemes and 2024 valuations to review their surplus framework as part of their negotiations. In our experience trustees are supportive of these discussions and recognise that the risk of trapped surplus.

“If this is not managed it could lead to unhelpful sponsor thinking and decision making. It is in everyone’s interests to solve this issue.”

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