Around £100bn from defined benefit (DB) pension scheme surpluses could be returned to scheme sponsors and members over the next 10 years, according to analysis from Isio.

The group said that it expects that around 40 per cent of schemes, by asset size, could invest beyond full funding on a buyout basis while sharing surpluses gradually with members and sponsors.

The group acknowledged that most DB schemes have traditionally targeted either buyout or self-sufficiency, pointing out that, in practice, self-sufficiency entails a cautious, low-risk approach to investing that only achieves a slower journey to buy-out.

However, it noted that purposeful run-on (PRO) has now also emerged as an option, as the government looks to unlock value from DB schemes and their surpluses, to recognise that there may be a better way for scheme members and employers to benefit from reaching very strong funding positions.

Isio’s approach to PRO sets a target buffer above full buyout funding, with the surplus gradually shared between the employer and members over the medium to long-term once this buffer has been reached.

Under this approach, schemes’ assets would be invested with the aim of continually replenishing surpluses, in line with the expectation of releasing an average of around 2 - 2.5 per cent of assets per year without taking excessive levels of risk.

Payments to employers would only be made following an annual assessment showing a surplus on a buyout basis, with the payment being less than the surplus and accompanied by a simultaneous discretionary increase to members benefits.

Under this framework, Isio found that DB schemes could return around 17 per cent of their assets to sponsors and members over the course of a decade, estimating that if 40 per cent of UK DB assets are used in this way, nearly £100bn could be shared between members and sponsors.

Isio also suggested that, with the current aggregate surplus across the UK’s private sector DB schemes estimated at £250bn, many schemes are already in a position to start distributing surplus.

And, according to the group, this will normally be possible without the overriding legislation to ease surplus distribution that the government is consulting on.

Isio partner, Stewart Hastie, said: “Many UK DB schemes now represent an opportunity rather than a problem to solve. The significant recent improvement in funding presents allows trustees and sponsors of the right schemes to invest past full funding on a buyout basis and gradually share emerging surpluses over the medium to long-term.

“PRO can be adopted today either as a target destination or by starting to gradually release surplus now for very well-funded schemes.

“For each scheme careful thought needs to be given to the interaction of funding, size, maturity, covenant, investment risk and balance of powers under the rules.

"Early collaborative engagement between employers, trustees and consultants will allow stakeholders to get the most out of their DB schemes.”

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