Following years in which deficits dominated discussions around defined benefit (DB) schemes, sponsors are increasingly focused on how to address schemes holding assets in excess of the amounts required to secure members’ benefits.

As more DB schemes approach buy‑out and wind‑up, both sponsors and trustees are also having to grapple more frequently with complex questions around surplus on wind‑up and so‑called “trapped surplus” during a scheme’s lifetime.

Trapped surplus

Strictly speaking, a surplus cannot be said to arise until a pension scheme is wound up. However, in practice, a form of “trapped surplus” may arise in an ongoing scheme where assets exceed liabilities, but legal or commercial barriers prevent extraction of the excess funds.

Unless an employer can demonstrate an unconditional right to surplus, accounting standards generally prevent recognition of the surplus on the employer’s balance sheet. In those circumstances, the surplus is regarded as trapped.

Surplus may become trapped in an ongoing scheme for a number of reasons, including:

• No express power: trust deeds and rules frequently do not include an express power permitting a return of surplus to the employer other than on wind‑up.
• Wind‑up provisions: wind‑up rules may not adequately address the application of surplus, or may only do so in narrow circumstances.
• Legislative constraints: in Ireland, there is currently no legislation expressly permitting the return of surplus to an employer from an ongoing scheme.

Options for dealing with trapped surplus

Where a surplus emerges, competing stakeholder interests are inevitable. Employers, many of whom have paid substantial deficit contributions in recent years, may seek outcomes that reduce future funding obligations or improve cash flow. Members, by contrast, may expect improvements to discretionary benefits.

Where continuation of the scheme remains the preferred option, employers may propose that trustees consider measures such as:

• a contribution holiday for the employer and/or employees;
• de‑risking strategies, including partial or full buy‑in or buy‑out;
• augmentation of benefits or reversal of previous benefit reductions;
• payment of scheme expenses from surplus.

Trustees must approach any such proposals with care. They are required to act in accordance with their fiduciary duties under trust law and the scheme rules, and should seek legal and actuarial advice. In particular, trustees must consider the risks to members associated with depletion of surplus, including the impact on long‑term scheme security and future funding volatility.

Developments in the UK and contrast with the Irish position

In the UK, the Pensions Schemes Bill 2025 proposes new statutory powers enabling trustees to release trapped surplus from DB schemes to sponsoring employers. The UK Government has framed these proposals as a means of unlocking capital for investment while maintaining member security.

In summary, the Bill would allow trustees, by resolution, to introduce an express power into their scheme rules permitting the return of surplus to the employer and to override existing restrictions on surplus return. The proposals represent a significant shift from the historic UK position.

No equivalent reforms are proposed in Ireland at this time.  Under current Revenue practice, a surplus exceeding 10% of scheme assets must be reported to the Large Cases Division. This has prompted questions as to whether Revenue might countenance the return of surplus where assets comfortably exceed the level required to secure benefits on a conservative basis, even under adverse scenarios. In practice, however, the Revenue Commissioners have not, to date, shown a willingness to support surplus refund proposals in ongoing schemes.

Avoiding trapped surplus

Given the challenges associated with releasing trapped surplus, and the uncertainty and potential conflict that can arise on wind‑up, both sponsors and trustees may have a shared interest in avoiding surplus becoming trapped in the first place.

As schemes approach full funding (on actuarial advice), alternative funding structures may warrant consideration. These can include escrow or reservoir trust arrangements, which enable employers to set aside contingent funding without paying additional contributions directly into the scheme unless specified trigger events occur (such as a deterioration in funding).

Surplus on wind‑up

As DB schemes increasingly prepare for buy‑out and wind‑up, trustees and employers must be alert to the legal issues that arise where surplus remains after members’ benefits have been fully secured.

Trustees’ primary obligation on wind‑up is to secure members’ benefits in full. Where surplus assets remain thereafter, the trust deed and rules will usually dictate how those assets are to be applied, although this is not always the case.

Commonly, scheme rules provide trustees with the power to augment members’ benefits before any remaining balance is returned to the sponsoring employer. In such circumstances, trustees must consider:

• whether employer consent is required to exercise the augmentation power;
• whether any conditions or limitations apply;
• whether the power imposes an obligation to augment benefits or confers a discretion.

When exercising a discretionary power, trustees must comply with settled trust law principles, including exercising the power for its proper purpose, taking into account all relevant considerations and ignoring irrelevant ones and avoiding decisions that no reasonable body of trustees could reach.  Relevant considerations will vary by scheme but may include:

• the scope and purpose of the power;
• the source of the surplus;
• whether the scheme is contributory;
• whether members previously experienced benefit reductions.

UK case law suggests that, provided trustees act properly in accordance with their scheme rules, the courts will be slow to interfere with their decisions regarding surplus application, even where members receive no additional benefits. While of persuasive value only in Ireland, these authorities support the view that scheme members have no general or automatic entitlement to surplus.

Silence in the rules and amendment issues

In rarer cases, scheme rules may be silent on the application of surplus. Trustees may then be asked to consider amending the rules to permit a return of surplus to the employer. In doing so, they must carefully assess:

• the scope of the amendment power;
• any restrictions protecting accrued benefits;
• the same fiduciary considerations that apply to discretionary powers.

If an amendment is not possible, employers may argue that surplus is held on resulting trust for their benefit. Whether such an argument succeeds will depend on a range of factors, including the contributory nature of the scheme and the historical funding pattern.

Disclosure and consultation obligations

Where trustees propose, on wind‑up, to exercise a discretion that would result in scheme assets being paid to the employer, certain disclosure and consultation requirements apply. Trustees must notify members of the discretion, explain how they propose to exercise it and why, and invite members to submit observations within one month. The discretion should not be exercised until the time limit has elapsed and any observations have been considered.

Next steps

Surplus in DB schemes raises complex legal, funding and governance questions.  Trustees who anticipate engagement with sponsoring employers on surplus utilisation or return should take early advice on both their scheme rules and their fiduciary obligations. Employers should expect trustees to require detailed legal and actuarial analysis before considering any surplus proposal, particularly where benefit augmentation powers exist or where proposals involve novel or complex features.