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Surplus or deficits on wind-up of a DB scheme

If there are surplus assets remaining in a funded defined benefit pension scheme in wind-up once the trustees have paid all benefits and liabilities of a scheme, these funds are distributed according to the scheme’s trust deed and rules and may be used to enhance benefits to members. If a pension scheme does not have enough funds to pay members their benefit entitlements, some benefits must be reduced.

The order of priorities set out in the Pensions Act, as amended determines how trustees reduce the benefits of members.  In these circumstances, the trustees first pay all benefits relating to AVCs and defined contribution benefits and then members who have reached normal retirement age or who have retired have priority over active members (members still in service) and deferred members (those who have previously left service but who have not retired).

See the section on scheme wind-ups for more detail. Active members and deferred members are especially vulnerable if a scheme winds up in deficit.