Over the past two decades, defined benefit (DB) pension schemes have transformed from financial burdens into valuable corporate assets. With the Government's 2025 Pension Schemes Bill set to simplify surplus extraction, now is the time for companies and trustees to reassess their DB endgame strategy.
Surplus release: funding level safeguard
A key issue in the Pension Schemes Bill 2025 is the funding level at which surplus can be extracted. Currently, surplus can only be withdrawn if scheme assets exceed the buyout level. The government plans to lower this threshold to the low dependency level, potentially expanding opportunities for surplus extraction.
This analysis shows the surplus that could potentially be immediately accessed from the FTSE 350 schemes - approximately £67bn based on a low dependency funding threshold and £29bn based on a buyout funding threshold. However, it's worth noting that these surplus amounts are expected to increase over time, making running on for a period of time the right strategy for some companies.
Assessing the optimal strategy
For a company considering the relative merits of running on versus an immediate buyout, the surplus that might be realisable in each future year needs to be assessed.
The financially optimal strategy is the strategy that maximises the net present value (NPV) for the employer. More detail can be found on our website.
The optimal strategy for the FTSE 350 companies
View the full report to see the strategies that will likely maximise economic value for the different FTSE 350 companies.
Our analysis shows that buyout as soon as affordable would be the optimal strategy for 33% of FTSE 350 companies. For the remaining 67%, value is maximised by running on for a period to generate additional surplus. The average time period to maximise the net present value for these companies is 10 years, with the period of run-on broadly increasing with scheme size.
For this group of companies, running on for a period after buyout funding has been reached means around £20bn of surplus value (in today's terms) could be released to FTSE350 companies, net of costs and taxes and adjusted for risk.
The FTSE 350 DB schemes account for around a third of the UK DB universe by asset size, so scaling up the £20bn amount suggests the value of DB scheme surpluses could be around £60bn for sponsoring employers should they each pursue the optimal financial strategy.
While financials are key, the choice of strategy also depends on broader factors like corporate expertise, risk appetite, and business plans. This analysis highlights that an active decision is required to determine the best approach.
Materiality of surplus extraction
This analysis shows that for the majority of companies the potential value of the DB scheme surplus is relatively small compared to the market capitalisation. Getting the decision right is still worthwhile of course though. However, for around 10% of companies the value of surplus relative to market capitalisation exceeds 5%. This threshold indicates that getting this decision right or wrong could materially impact the company's valuation.
For 12% of the companies where running on has been identified as the optimal strategy, the annual surplus release (over an average run-on period of 10 years) exceeds 10% of pre-tax. Again, this illustrates that for some companies getting this right or wrong could have significant financial implications for the sponsor.
This cohort of companies could be undervalued if investors overlook the potential DB scheme surplus value - highlighting that accounting figures may not fully reflect a scheme's true worth.
