Surplus Trust Assets: Trap or Opportunity?

Surplus Trust Assets: Trap or Opportunity?
May 28, 2026 6 mins

Surplus Trust Assets: Trap or Opportunity?

Surplus Trust Assets: Trap or Opportunity?

As pension funding levels rise, surplus assets increasingly represent both opportunity and risk. A strategic framework for effective surplus decision making outlines how sponsors can evaluate durability, constraints and efficiency before pursuing any surplus strategy.

Key Takeaways
  1. Surplus value is not guaranteed. Sponsors must validate durability and constraints before acting to avoid unintended tax, regulatory and fiduciary risk.
  2. Surplus can mask hidden inefficiencies. Many sponsors effectively fund benefits at their cost of capital while surplus assets remain in lower yield trust portfolios.
  3. A disciplined framework can unlock opportunity. Sponsors that take a staged, evidence based approach are better positioned to redeploy surplus successfully and achieve corporate objectives.

What is The Surplus Paradox?

The average pension plan is now more than 100% funded, yet many sponsors are still evaluating how to safely monetize surplus. At the same time, organizations continue to fund related benefits from corporate cash, while surplus assets sit in low‑yield, liability‑hedging portfolios inside the trust. Despite regulatory friction, some organizations have already used surplus to support other benefit programs and reduce ongoing employer cash spend.

Why it Matters: The Cost of Inefficiency

Strategic redeployment of surplus assets can potentially provide meaningful near‑term liquidity.

An Inefficient Surplus Scenario:

  • A sponsor with $50 million in stranded surplus invested in a de‑risked, liability‑hedging portfolio might also pay $5 million a year for 401(k) matching contributions or active medical premiums from corporate cash.
  • Economically, this is equivalent to borrowing at a company’s cost of capital to fund the 401(k) match, while leaving $50 million invested in corporate bonds (often yielding less than that cost of capital) inside the trust.

Many surplus redeployment strategies have depended on IRS private letter rulings (PLRs), which have become more difficult to obtain as certain transactions have been added to the IRS ‘no‑ruling’ list and guidance on Voluntary Employees’ Beneficiary Association (VEBA) redeployments has effectively stalled. Penalties for missteps are also severe: a direct reversion of surplus pension assets is generally subject to a 50% excise tax on top of corporate income tax, potentially eroding more than 70% of the asset’s value, and a VEBA reversion can be subject to an excise tax as high as 100%.

Although this environment has deterred many, some sponsors have moved ahead. For example, some have used pension surplus to fund other benefits, such as voluntary early retirement programs. Aon has also identified nearly 15 transactions involving retiree medical trusts across large employers in sectors such as utilities, industrials and telecommunications. Although transactions involving 401(h) accounts did receive PLRs from the IRS, VEBA‑based transactions generally did not.

Surplus trust assets do not automatically represent value, and accessing them without a diligent approach can create more risk than benefit. Yet leaving materially overfunded plans in low‑yield holding patterns while funding other benefits from corporate cash can leave meaningful flexibility untapped.

A Strategic Framework for Surplus Utilization

Rather than jumping straight to transactions, effective surplus decision‑making starts with testing which constraints truly apply, and which are simply assumed. We recommend treating this as a staged process:

  • 1. Due diligence to confirm surplus durability

    The first step is confirming that surplus is both real and resilient. That means assessing funding levels relative to future accruals, testing key assumptions and evaluating how the current investment strategy and risk profile could reintroduce volatility. Sponsors should also review how plan expenses are paid and whether certain trust amounts are tax‑exempt. The goal at this stage is not precision, but confidence that the surplus is durable enough to plan around.

  • 2. Optimize across funding vehicles, not plan by plan

    Surplus decisions should be made across funding vehicles, not plan by plan. Pension surplus may sometimes be repositioned through plan mergers or transfers to IRC Section 401(h) retiree medical accounts within the pension trust. On the welfare side, explore potential to leverage 401(h) assets in lieu of VEBAs that can help right size funding and, in some cases, enable pension plan termination that was previously blocked by stranded amounts.

  • 3. Align benefit promises with the most efficient funding source

    With funding levels optimized, sponsors can assess whether certain benefits are funded inefficiently. In some cases, benefit designs can be restructured so that existing surplus supports programs previously funded with corporate cash—optimizing cash flow without impacting benefits. For example, all or a portion of a company’s 401(k) contribution could be funded by surplus pension assets.

  • 4. Use surplus selectively to enhance benefit design

    With stability established, some sponsors may choose to deploy surplus to strengthen their benefit offering in targeted ways. Options include introducing lump‑sum options, funding Retirement Health Reimbursement Accounts (RHRAs) or adding hybrid benefits. These decisions should be framed as risk‑management tools and evaluated against long‑term sustainability.

  • 5. Integrate surplus into workforce and transaction planning

    Surplus can support broader workforce or transaction objectives. Pension assets may enable phased retirement programs, early retirement windows or benefit bridges tied to restructuring or M&A activity. Used thoughtfully, surplus can reduce friction during periods of change while maintaining fiduciary integrity.

67%

of plan sponsors plan to keep their pension plans, with only 33% aiming to terminate.

Source: Aon’s 2025 Global Pension Risk Survey

Design Considerations

Even when a surplus strategy appears economically attractive, execution must fit within tax, fiduciary and administrative realities. Certain actions can trigger notification requirements, and replacing defined contribution benefits with defined benefit allocations introduces design constraints that must be carefully managed. These considerations do not eliminate opportunity, but they do demand rigor.

Using Surplus Strategically

Surplus trust assets do not have to remain a permanent trap. When viewed through an integrated funding, governance and workforce lens, they can become a source of strategic flexibility. A surplus can:

  • Support benefits more efficiently
  • Enable workforce initiatives
  • Free up corporate capital

The key first step: Convene finance, HR and plan fiduciaries—along with ERISA counsel and an experienced advisory partner—to establish a shared surplus roadmap. A comprehensive working group ensures that when conditions align, the organization is prepared to move forward with confidence.

If you would like to evaluate whether surplus assets are being deployed efficiently—and how they may support broader benefit and capital objectives—please contact our team for additional insight.

Redefining Pension Strategy: New Paths for Plan Sponsors in a Fully Funded Era

Article

Redefining Pension Strategy: New Paths for Plan Sponsors in a Fully Funded Era

Defined benefit plans have entered a new era, with many now fully funded and supported by a deeper, more competitive pension risk transfer market. This shift enables plan sponsors to move beyond traditional end states and adopt more dynamic strategies—whether maintaining, hibernating, or exiting. Success depends on aligning long-term objectives with evolving market conditions, leveraging customized investment approaches, and using risk transfer tools to improve outcomes and manage liabilities with precision.

Read the Article
Aon’s Thought Leaders
  • Sannidh Amberkar
    Associate Partner, Retirement Consulting
  • Matt Maloney
    Senior Partner, U.S. Wealth Solutions Innovation Leader

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

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