Fewer UK defined benefit (DB) pension schemes are now granting inflation-driven discretionary increases, according to a survey by Aon.
When compared with the two previous years, the more benign inflationary environment seen in 2024 and over the first half of 2025 is regarded as the most likely reason.
An evolving approach to how schemes are managing discretionary benefits during a period of lower inflation and with growing attention given to surplus sharing is revealed in Aon’s 2025 Discretionary Pension Increase Survey, which covered over 200 UK DB schemes.
The survey found that just 13% of schemes granted a discretionary increase in 2024, down from 17% in 2023.
Looking ahead, 12% of schemes say they are planning to or are likely to grant a discretionary pension increase in 2025.
A further 9% of schemes are now looking to grant some other form of discretionary benefit.
Three other findings reveal: one, that scheme funding level has a considerable influence on decisions: all schemes that granted a discretionary increase were fully funded on a ‘technical provisions’ basis, while 58% of those granting a discretionary increase in 2024 were fully funded on a solvency basis.
Two, 61% of the schemes offering a discretionary increase in 2024 and which had a planned endgame, were intending to run-on rather than insure at the earliest opportunity.
And three, 83% of schemes have not decided how to share any surplus between the sponsor and members.
“Pension schemes are facing evolving challenges around discretionary increases and in the way they distribute surpluses,” said Nick Coates, associate partner and head of member distributions for Aon.
With the proportion of schemes granting a discretionary pension increase in 2024 lower than in the previous year Aon see a similar picture emerging for 2025.
“However, in the future we expect to see more schemes considering these increases, driven by better funding positions and the greater flexibility to release surplus, as outlined in the Pension Schemes Bill,” added Coates.
Endgames matter
But endgame plans also matter.
“We’ve seen that schemes intending to run-on are more likely to grant discretionary increases – which is not a surprise,” added Coates. “However, if it significantly delays the timeline for their endgame or if there are concerns over sponsor covenant, those looking to insure might now be less likely to grant a discretionary increase.”
Furthermore, following on from the Pension Schemes Bill, the Pensions Regulator’s endgame guidance in June 2025 suggests that schemes seeking to run-on should agree a policy of surplus distribution.
“Our survey suggests much more work is needed in this area, with 83% of schemes yet to form a policy for sharing surplus between members and the sponsor,” said Coates.
“As schemes have become better funded there are complex issues for trustees to work through on when and how discretionary benefits are awarded,” added Coates. “Simply retaining the surplus and building up more could lead to significant intergenerational unfairness among members. For example, if discretionary benefits are only awarded 10 years down the line, it will only be those still alive who can benefit – so the timing of the surplus release is important.”
The survey revealed that the most common method for releasing surplus is to grant a one-off ‘pre-1997’ discretionary pension increase.
However, there are other ways to share surplus among members, depending on the circumstances and the scheme rules.
“There are ways to navigate through the moral and current tax issues of awarding a discretionary benefit, but many trustees aiming to insure plans rather than run-on might prefer to avoid some of the complex decisions around utilising surplus simply by insuring before a surplus has emerged,” Coates added.
“Schemes may need to justify whether and how they apply discretionary increases or distribute surplus,” Coates said.
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