James Newcome
- Senior Associate
- Pensions & Employee Benefits
DB surplus major flexibilities: the new regime takes shape
The concept of “trapped” defined benefit pension scheme surplus has moved quickly from theoretical issue to mainstream policy question. Many DB schemes are now better funded than they were only a few years ago, and the Government is seeking to make it easier for well-funded on-going schemes to share surplus with sponsoring employers and members.
At its simplest, a pension scheme surplus means that the scheme has more assets than it expects to need to pay members’ benefits. However, the existence and size of any surplus depends on the funding basis used. A scheme may be in surplus on a low dependency basis, but not on a full buy-out basis. The low dependency basis broadly indicates that the scheme is funded and invested so that, by the time it is mature, it should not need further support from the employer. The buy-out basis sets out what it would cost to secure members’ benefits with an insurer.
DWP says around four in five DB schemes are now in surplus, with estimated aggregate surplus of around £160 billion. Others say this is an over-estimate. Whatever the figure, it is large and release of surplus is a hot potato!
In our July 2025 Pensions Compass article, “Part 2 – Surplus reforms”, we considered the Government’s proposals in the Pension Schemes Bill to make surplus payments to employers easier for ongoing DB schemes, and our later February 2026 article, “Part 3 – Buy ins, buy outs and surplus – lessons from Coca Cola” considered a specific court case and the reinsurance aspects that may arise in a historic buy-in. Pension Schemes Act 2026 (Royal Assent 29 April 2026) contains the legislative framework and the draft Regulations needed to implement the Act’s “surplus” provisions for on-going schemes have now arrived.
DWP consultation
On 10 June 2026, DWP published its consultation on “Surplus Flexibilities for Defined Benefit Pension Schemes: Unlocking Value for Employers and Scheme Members.” The consultation seeks views on the draft Occupational Pension Schemes (Payments to Employer) Regulations 2027 and closes at 11:59pm on 2 September 2026.
Subject to the upshot of the consultation and to Parliamentary approval, DWP intends the Regulations to come into force on 6 April 2027. There are no transitional measures: any surplus release before April 2027 remains subject to the existing regime under the Occupational Pension Schemes (Payments to Employer) Regulations 2006. The 2006 Regulations would continue to apply for surplus payments on winding-up under section 76 of the Pensions Act 1995.
Current position
Under the current regime, paying surplus from an ongoing DB scheme to an employer is difficult. Broadly, trustees need a power in the scheme rules and, where relevant, that power must have been preserved by a section 251 resolution before the 2016 deadline. Schemes which did not have, or did not preserve, the relevant power are generally prohibited from paying surplus to an employer on an ongoing basis.
The Pension Schemes Act 2026 changes that position by giving trustees a statutory modification power. This will allow trustees to amend their scheme rules so that surplus can be paid to the employer, including where the scheme rules do not currently contain a usable surplus payment power or contain barriers to release. Importantly, this is not an automatic employer entitlement: the power sits with the trustees. The statutory power also entitles trustees to impose restrictions on the new power.
Low dependency replaces buy-out
The key policy choice in the draft Regulations is the scheme’s funding threshold. The current regime uses a buy-out basis. The new draft Regulations would move to a low dependency funding basis, aligned with the 2024 DB funding regime. The policy intention is that, by the time the scheme is mature, it should be largely independent of further employer support.
This is a major change. It makes surplus release potentially much more accessible because a scheme may be fully funded on a low dependency basis but still below full buy-out funding. However, that also means trustees will need to think carefully about whether release below buy-out creates unacceptable reliance on employer covenant or affects investment performance. Low dependency is a minimum threshold, not an instruction to pay out everything above that level. Trustees and employers will need to decide what buffer should remain in the scheme after the release.
The forward-looking test
The draft Regulations also introduce a forward-looking element. Before surplus can be paid, the actuary must be satisfied that the scheme is not only above the low dependency threshold at the time of release, but is expected to remain at or above that level over the following three years. More specifically, the actuary must be satisfied that the scheme’s assets are at least as likely as not to remain greater than its liabilities at any point over that three-year period.
The proposed surplus journey
The DWP’s illustrative surplus journey is not prescriptive, but it shows the likely shape of the process:
- Preparation — trustees and the employer check whether the scheme rules permit payments to the sponsor, or whether the new statutory power is needed.
- Actuarial assessment — trustees commission an actuarial assessment, either as part of the triennial valuation or at another time.
- Negotiation — trustees consider a provisional payment amount, take actuarial advice and may also seek covenant, investment and legal advice. The outcome may include an employer payment, member enhancements or one-off member payments, and a retained buffer.
- Member notification — members must receive written notice at least three months before the intended payment date.
- Final certification and payment — the actuary provides the required certificate, the employer consents, and the payment must be made within five working days of the certificate.
- Pensions Regulator (TPR) notification — TPR must be notified within one week after payment, including details of the funding position, employer payment and any member enhancements or authorised member surplus payments.
TPR and member benefits
TPR’s 10 June 2026 statement emphasises that trustees’ independence is unaffected. Trustees must decide whether surplus release is appropriate in the proper exercise of their fiduciary duties, should not be placed under undue pressure and should take appropriate advice, consider conflicts and document their reasoning.
The Government is not mandating that surplus must be shared in any particular way, or indeed that it be shared at all. However, DWP expects trustees to consider how members might also benefit where an employer surplus payment is being made. This could be through benefit improvements, discretionary increases or direct surplus payments to members. The tax framework is also being amended so that authorised member surplus lump sum payments can be made, although payments to members below Normal Minimum Pension Age would need to be deferred until that age.
Legal and practical issues
Scheme rules will still matter. The statutory modification power is helpful, but trustees will still need advice on existing surplus provisions, amendment powers, historic section 251 resolutions, restrictions in the rules, employer consent requirements and the interaction between ongoing and winding-up provisions. The new regime is aimed at ongoing surplus payments; schemes in wind-up remain outside these Regulations.
Fiduciary duties remain central. The express statutory “interests of members” test is being removed, but trustees must still act properly, take account of relevant factors, disregard irrelevant factors, manage conflicts and reach a rational decision. For many trustee boards, the harder question will not be whether the legal threshold is met, but whether release is appropriate and, if so, how much and on what terms – these are matters on which trustees and indeed employers will need legal advice.
The five-working-day payment window may be one of the more difficult operational points. It is designed to ensure the payment reflects up-to-date funding information, but trustees, employers, actuaries, investment advisers, administrators and banks will need to be closely coordinated. If markets move materially between the initial assessment, member notice and final certificate, the final amount may need to change or the payment may not proceed.
Member communications will also need care. Members will be notified of a proposed employer surplus payment at least three months before it is made. That notice may be sensitive, especially if members are not receiving equivalent benefit improvements. Clear communication will be needed on why trustees consider the payment appropriate, what protections remain and how fairness between different groups has been considered including deferred members and active members who cannot usually access pension benefits before Normal Minimum Pension Age.
Multi-employer and sectionalised schemes may raise additional issues around which employer should benefit, how surplus is allocated between sections, what consents are needed and how historic funding support should be taken into account.
What should trustees and employers do now?
The new regime is not yet in force, but trustees and employers can prepare by reviewing scheme rules and any section 251 resolution, understanding the scheme’s funding position on low dependency and buy-out bases, considering whether the long-term objective is buy-out or continuing to run the scheme on, and developing a surplus policy (referred to in TPR’s 10 June 2026 statement).
Trustees should also consider the buffer to be retained, whether members should share in surplus, the strength of the employer covenant, whether contingent asset support may be needed and whether the investment strategy supports the proposed approach. How far these matters should be recorded as “restrictions” in the resolution exercising the trustees’ new statutory power modifying scheme rules remains to be seen. Trustees will also need to consider whether data, administration, GMP equalisation and historic amendment issues are sufficiently clean before any money leaves the scheme.
WB Comment
The draft Regulations are a significant step towards a more flexible DB surplus regime. They answer one of the key questions left open when the Pension Schemes Bill was introduced, by confirming that the proposed funding threshold is low dependency rather than buy-out.
That said, surplus release will not be a simple box-ticking exercise. The most difficult cases are likely to be those where a scheme is above low dependency but below buy-out. That is where the new flexibility is most meaningful, but also where trustees may feel most exposed. In those cases, we expect to see careful negotiation around buffers, phased payments, contingent assets and member sharing. Likewise, employers may have definite views which often may not coincide with scheme trustees’ views, at least initially. Indeed, members may have their own different views.
Given the large amounts potentially at stake, applications to the Court to approve proposed pension sharing, being a momentous trustee decision, may occur in some cases.
The proposals are also likely to accelerate a broader shift in endgame thinking. For some schemes, buy-out will remain the natural destination. For others, the ability to run-on and release surplus may become a realistic and desirable alternative particularly from the trustee perspective. The key point is that running on with a view to surplus release should be a conscious strategy, supported by proper advice and documented decision-making, rather than a passive consequence of improved funding.
The consultation on the draft Regulations closes on 2 September 2026. Trustees and employers with well-funded DB schemes should consider now whether they wish to respond and, in any event, whether their governance, documentation and funding strategy are being got ready for the new regime.
The Government’s response this Autumn to the consultation on the draft Regulations will be eagerly awaited. Not least by TPR who will then consult on its own guidance.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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Clive Weber
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