You have to ask yourself, what would he get on the open market this summer as a UFA?
Certainly, he'd get 2.5M x 2 or more. A veteran defensive matchup C who can PK and win faceoffs, but can't provide enough offense to be used up higher in the lineup is at least worth that.
He'd absolutely get a return at half retained either at the deadline or in the offseason. The early part of the offseason probably makes more sense than the trade deadline because teams have a lot more cap flexibility and willingness to move parts.
I don't think the Islanders would have to retain half. The cap is going up to 87.5M. Someone would probably take Pageau at 3M-3.5M x 2 years for late pick. Which would be win/win for both sides. The Islanders would tie up a retention spot for 2 years, but they would also free up 3M+ of cap. A buyout is going to be more expensive cap wise.
They also could just keep him. If he can still be a defensive C, they would still be getting value out of him, with the rest of his hit just being a sunk cost.