Putting defined benefit surplus to good use
Strong market returns and rising interest rates over the past several years have put many defined benefit (DB) pension plans firmly in the black. Decisions on what to do with that surplus, however, have been less than firm as plan sponsors grapple with fear of future volatility. This was particularly the case at the start of this year when tariff announcements reminded everyone how quickly surpluses can deteriorate.
About a decade ago, when many jurisdictions reviewed their funding rules to ease solvency funding for DB plans, many sponsors’ contributions decreased dramatically. While some might have foreseen a levelling off of solvency ratios, few could have predicted the economic confluence of rising interest rates and strong market performance that would result in significant surpluses and the conundrum about what to do with those surpluses that followed.
The typical solvency ratio for Ontario DB plans stood at 124% as of September 30, 2025, according to the Financial Services Regulatory Authority of Ontario (FSRA). The question plan sponsors must now answer is whether their caution is leading to missed opportunities to put surplus to good use.
Getting creative to expand on popular options
While caution remains, many plan sponsors are finding ways to put surplus assets to good use. Common approaches include contribution holidays, de-risking strategies, annuity purchases, wind-ups, and benefit improvements. Beyond these, where permitted by the plan and aligned with organizational objectives, additional creative options may be worth considering:
- Extend contribution holidays to members in contributory plans or cover defined contribution (DC) contributions and/or fees.
- Enhance DC arrangements by adding new provisions or merging an existing DC plan into the DB plan.
- Merge DB plans to streamline administration and funding.
- Adopt dynamic de-risking of plan assets as funded status improves—maintaining flexibility while avoiding mandated contribution holidays.
- Assign a separate asset allocation for surplus assets, potentially taking on greater risk or, conversely, immunizing surplus to prevent a return to deficit.
- If you have an unregistered supplementary pension plan (SERP), consider whether any benefit payable under the SERP can be shifted to the registered plan via a plan amendment. For example, if your registered plan is not indexed, a one-time increase to retiree pensions under the registered plan within the Income Tax Act limits and corresponding reduction to SERP pensions is a way to shift some of your liabilities under the SERP into the registered plan.
- Explore legislative options that allow sponsors or members to receive part of the surplus through lump-sum payments in cases of extreme “trapped” surplus.
A note about equity
If you are considering ways to share surplus for the benefit of members, it is important to note that surplus usage always brings to mind the question of inter-plan and inter-generational equity (i.e., whether the costs and benefits of the pension plan are being fairly shared across all past, current and future members.) Perhaps there are outdated plan provisions (like frozen limits to annual pension accrual, for example) that you would like to refresh. If you have multiple plans, consider whether improving provisions in one would help make benefits equitable across all plans. Would pension increases for pensioners create more equity? These are all important considerations for which your actuarial team can offer greater insights on the financial impacts to cash and accounting costs, past service pension adjustments, governance and communication considerations, etc.
Longer-term strategies
At a time when many Canadians are feeling financially unprepared for retirement, DB plan members can appreciate a sense of long-term security and DB plan sponsors are finally getting a break from underfunded benefits and high/volatile contributions. This favourable financial time gives sponsors a chance to use plan surplus to make long-term investments in pension governance, administration and education. While these costs can often be paid out of the pension fund, it might be easier to get stakeholder buy-in when funded status is high and options about what to do with surplus are being considered.
Here are a few of examples of longer-term investments to explore:
- An online portal: Spurred by the challenges of conventional paper-based communication and the covid-induced work-from-home environment, DB plan administrators are embracing electronic communication for active and retired plan members like never before and regulators have recognized this trend by amending legislation related to electronic communications. Using surplus to invest in an online portal is a smart long-term investment that allows your members efficient and prompt access to tools and information – and reduces the financial and administrative burden often associated with paper-based communication.
- Data storage and transfer solutions: IT security guidelines are a top focus for many companies and regulators. Investing in data storage and transfer solutions that allow an HR team to securely share and receive pension related documents with plan members or approved third party pension providers helps ensure compliance with security guidelines and provides for more timely and efficient communication.
- A governance and risk-management review: In light of emerging and evolving risks within the pension landscape, the Canadian Association of Pension Supervisory Authorities (CAPSA) released Guideline No. 10 – Risk Management for plan administrators. By establishing a robust governance risk management framework, plan administrators can better protect the assets of the pension plan, reduce operational risks, and continue to safeguard the benefits promised to plan members.
Deciding what to do with your surplus begins by determining how much you want to put to use and how much to save as a buffer against future volatility. Your actuary can help you explore options and provide insights on the financial impacts and other considerations. At a minimum, implementing regular monitoring and establishing an actionable plan now will help you make quick adjustments to implement future plans and achieve your objectives.