Unlocking pension potential: Government plans to reform DB pension surpluses in 2025

The government’s pension reforms have continued apace in 2025, with the pensions investment review consultation closing in mid-January, ahead of legislation expected to be introduced in Parliament in March/April. So far, the focus of these reforms has largely been on the role that DC master trusts and local government pension schemes, particularly in how they can support productive finance in the UK economy. 

To date, the one part of the pensions industry that had been largely unaffected by these proposed reforms was private sector defined benefit schemes. Given that most of these funds are mostly closed and de-risking, therefore they have more limited capacity to invest in UK equities or UK infrastructure. 

However, this changed in the past week with the government making some key announcements on DB pensions. Perhaps the most significant is the Prime Minister and Chancellor’s announcement of their intention to change the rules regarding DB pension scheme surpluses. The government intends to lift restrictions on DB funds, enabling sponsors to be able to invest their surplus funds in ‘the wider UK economy’. This could mean investing these funds in their core business, provide additional benefits to pension scheme members or sharing funds with their DC schemes. 

Given that most DB are now in surplus, the amounts involved are quite significant (according to government figures, this could be worth £160 billion). Although there is some scepticism about how ‘real’ these surpluses are, and how much value a sponsor could realistically free up from them. John Ralfe expressed such concerns in his recent Telegraph piece.

There are hopes that these reforms will enable schemes to broaden their investments and take on greater risk. However, these reforms could also place DB pension scheme trustees under some additional scrutiny in future. With the removal of restrictions, trustees could find themselves under pressure from sponsors to hand back portions of surpluses, while scheme members may demand enhanced benefits - all while they need to fulfil their fiduciary duties. This means that the devil is likely to be detail on the appropriate guardrails that will accompany this reform. The government is due to set out this detail in its response to the Options for Defined Benefits consultation, due this Spring. 

Total mentions by topic (January - February)

• Pensions funding and deficit saw the greatest number of mentions between December and January with 522 stories, followed by State Pensions with 218 stories.

Examples of Pensions funding and deficit mentions this month 

• @leicesterliz - The mask has slipped: Kemi Badenoch and the Tories wants to cut your state pension. Labour will protect the triple lock, guaranteeing the new state pension will rise by £470 from this April and by up to £1,900 over the course of this parliament.
• @darrenpjones - Under the last government, miners had hundreds of millions of pounds kept back from their pensions. As chair of the committee in Parliament I worked with colleagues to right this wrong. Now, with a Labour government, we’ve fixed that in our first budget.
• @premnsikka - 1.9m England pensioners live in poverty. Low wages, high living costs, low state pension. Winter fuel payment cut deepens the crisis. Full UK post-2016 state pension, received by 26%of retirees, is less than 50% of the minimum wage. Poverty kills.