Surplus Under Scrutiny: Can DB Funds Be Used for DC Benefits?

Improved funding levels across defined benefit (“DB”) schemes in the UK have in recent years brought surplus use firmly back into focus.  Many pension schemes have both defined benefit and defined contribution (“DC”) unsegregated sections within a single scheme.  In these circumstances, schemes are sometimes able to use surplus arising from the DB section to fund the DC section where the scheme's rules permit and consequently using surplus in this way has become a greater topic of interest.

Typically, DC schemes are significantly less generous to members than DB schemes.  This has contributed to generational inequality in the workforce where DB arrangements have become increasingly rare over time, leaving employees with DC pensions more exposed to investment risk and adequacy concerns than their DB counterparts.  Using surplus to enhance DC member benefits can be seen as a way of rebalancing this inequality.  However, this approach often proves unpopular among members who only hold a DB pension and would prefer surplus to be used to improve DB member outcomes, as is often permitted but not required under scheme rules.  This inequality also remains unaddressed where DB surplus is used simply to replace employer DC contributions for a time rather than to provide extra DC contributions, as this effectively provides employers with a contribution holiday without improving outcomes for DC members.

Where there are competing potential uses of surplus which benefit different categories of member, this creates challenges for trustees in navigating these competing interests. Case law has established that trustees must operate the pension trust in accordance with its rules, for its proper purpose and can treat different categories of member differently where they have a discretion in how to utilise surplus funds.  Consequently Trustees may, after following the correct process, conclude they have sufficient latitude to allow DC members to receive benefits from surplus without the equivalent having to be provided to DB members.  As mentioned, before any decision is arrived at, it is crucial the correct process is followed by taking into account all relevant considerations, discarding all irrelevant ones, taking, considering and understanding professional advice and deliberating among themselves.

Considering these issues, the High Court has recently confirmed the trustee of the £19bn HSBC pension scheme can amend the scheme rules to allow surplus to be used to meet contributions for the DC section with immediate effect.  The HSBC DB schemes have a considerable surplus of £2.8bn, and HSBC will use some of the surplus to meet its DC contributions of around £152m a year for 4 years. In this instance, the scheme rules already contained a power to use the surplus to make DC contributions, however the trustee wanted to amend this rule to clarify its operation, in light of there no longer being any active members.  The court application has fuelled existing discontent among DB members, particularly given long‑standing concerns around this particular scheme’s “clawback” (or state deduction) provisions, which reduce certain members’ DB benefits when the state pension becomes payable.  In its reasoning the High Court confirmed it was not considering the best or fairest use of the surplus, but instead whether this was a decision the trustee could take and whether it had followed the correct process in doing so. 

Where DB and DC benefits are provided by technically separate pension schemes, it may still be possible to use surplus for employer DC contributions, however absent a scheme merger this usually requires the surplus to be returned to the employer before it is transferred to the DC scheme.  The repayment of surplus to sponsoring employers is a far more complex process, which is heavily regulated and is currently subject to a 25% tax charge, as well as a member consultation process.  There is also greater complexity in relation to trustee duties, as legislation places an additional requirement on trustees to be satisfied the employer repayment is in the interests of members, creating uncertainty as to whether this goes beyond common law fiduciary duties.  

However, the process for making employer repayments from surplus is the subject of considerable reform under the Pension Schemes Act 2026, which aims to make it easier to release surplus from ongoing schemes.  Reforms under the Pension Schemes Act 2026 demonstrate a shift away from surplus remaining trapped in well‑funded schemes until buy out or wind up, and towards greater flexibility to deploy surplus where it can support better member outcomes and assist economic growth.  A consultation on regulations for surplus release requirements is expected to take place anytime from mid 2026, with final regulations and regulatory guidance to follow.  The Government’s DB roadmap anticipates the new surplus regime will be in force by the end of 2027 (workplace pensions roadmap).  To find out more about the changes please see our 2025 article on releasing surplus and our Pension Schemes Act Handbook detailing the key reforms.

Although the reforms are a promising opportunity, the decision to use surplus to support DC benefits will be at the discretion of the trustees and/or the employer, depending on the facts applying to the scheme.  Therefore, although surplus will become more accessible, this does not represent a reliable solution to DC adequacy concerns.  It remains to be seen whether the opportunity to use surplus to provide funds for or even boost DC provision will substantially translate into enhanced DC member outcomes or whether alternative solutions will (still) need to be found.  We will continue to monitor with interest emerging trends in the use of surplus, DC pension adequacy and how the two interact.

Written by Lauren Young and Maegan Watts.