Part 2 – Surplus reforms

The UK Government has taken a significant step with the introduction of the new Pension Schemes Bill towards making it easier for defined benefit (“DB“) pension scheme surpluses to be paid to employers.

According to the Government’s consultation response in relation to options for DB schemes (published on 29 May 2025) (the “Government’s Response”), this long-anticipated reform aims to unlock up to £160 billion in surplus assets with a view to enabling employers to reinvest in their businesses, increase productivity, boost wages or utilise it for enhanced contributions in their alternative defined contribution (“DC“) schemes.

Key Points

Under the proposed legislation:

• Trustees of ongoing schemes will be empowered to modify scheme rules by resolution to allow surplus to be paid to employers, even where no such power currently exists.
• The requirement to pass a resolution under section 251 of the Pensions Act 2004 will be omitted, simplifying the process.
• Regulations will be needed before the new powers will be available to trustees, which may not be until 2027 at the earliest.

Current Position for Ongoing Schemes

The way in which schemes pay surpluses to employers, and the statutory framework around paying surpluses to employers, differs depending on whether schemes are ongoing or are in the process of winding-up.

Under the current statutory regime, schemes must have passed a resolution known as a “section 251 resolution” by 6 April 2016 if a surplus is to be paid to a sponsoring employer on an ongoing basis. These resolutions allow pension schemes with a pre-existing power to pay a surplus to employers to continue to be able to do so. Schemes that either: i) did not have a pre-existing power to pay surplus to employers on an ongoing basis; or ii) did not preserve such power using a section 251 resolution, are prohibited from paying surplus to an employer on an ongoing basis.

The new Pension Schemes Bill will remove the requirement for a section 251 resolution completely, making it easier for scheme surpluses to be paid to employers on an ongoing basis going forward. The new powers to repay surplus will not apply automatically. Trustees will be required to pass a resolution to modify their scheme before payment of a surplus can be made under the new power to an employer on an ongoing basis. In addition, the Pension Schemes Bill removes the express requirement for trustees to be satisfied that the surplus payment is in the best interests of members (but, importantly, trustees must still comply with their fiduciary duties).

Current Position for Schemes that are Winding-up

The allocation of any surplus assets held by a scheme on wind-up is determined by a scheme’s rules. Whilst every scheme will be different, typically trustees have a choice between allocating any surplus to the sponsoring employer, topping-up members’ benefits on scheme wind-up or applying a mixture of both.

The proposed new power under the Pension Schemes Bill does not apply to schemes that are winding-up. However, there seems to be nothing in the Bill to prevent the proposed new power once introduced being used shortly before the winding-up of a scheme. More detail around this will no doubt appear in regulations.

Scheme trustees should continue to ask their legal advisers to review the rules and confirm how surplus assets can be allocated on scheme wind-up.

Allocating Surpluses to Members for Ongoing Schemes

The Government Response suggests that schemes could use surplus funding to unlock increased benefits for scheme members, including through providing discretionary benefit increases. However, no new direct powers have been proposed under the Pension Schemes Bill aimed at using the DB scheme surplus to top-up members’ benefits in their DB scheme whilst the scheme is ongoing. The new powers are solely focused around paying surpluses to employers. That said, any surplus paid to the employer using the Pension Schemes Bill powers can be used by the employer to, for example, top up members’ benefits in an alternative DC scheme. It should be noted however that the Pensions Regulator mentions that where a surplus may be used to fund employees’ DC payments, trustees should ensure there are adequate skills, knowledge and understanding to ensure that the DC scheme is also well governed. It will be interesting to see whether any further regulations or guidance will provide more details around how employers may use payments out of surplus.

In addition, trustees of ongoing schemes may wish to ask their legal advisers to confirm whether any augmentation power under their scheme rules may allow members’ benefits to be topped-up using surplus funds, or whether any existing discretionary increase provisions apply under which surplus funds could be used to uplift members’ pension increases. The Pensions Regulator has acknowledged in its funding statement published on 24 April 2024 that schemes are facing increased calls to provide discretionary increases.

Schemes should, however, consider the tax treatment of any additional benefits paid to members using surplus funds, particularly in relation to any additional one-off lump sum payments to check that any such payments are authorised payments. Further legislation may be needed to ensure such payments are treated as authorised payments for tax purposes; tax treatment is being considered according to the Government’s Response.

Tax on surplus paid to employer

The rate of tax on surplus payments to employers will remain at 25%. The DWP believes that “the pension tax framework is broadly balanced and fair but says that the Government will continue to consider the wider tax regime for surplus extraction.

Notice to Members

Where a scheme is in wind-up and a decision (or a decision in principle) is made to pay any surplus to the sponsoring employer, certain statutory notice requirements must be met before the surplus can be paid to the employer. Notably, the scheme must give members a total of five months’ notice to make representations across two separate notices (two months’ notice must be given under the first notice and three months’ notice under the second notice).

It is likely that subsequent regulations will provide requirements around the notice that must be given to members before payment can be made to employers on an ongoing basis under the proposed powers under the Pension Schemes Bill.

Timescales

The Government’s workplace pensions roadmap published on 5 June 2025 sets out the expected timetable for the new Pension Schemes Bill and subsequent regulations that will be needed to bring many of the new provisions into force.

Provided that all goes to plan, Royal Assent is expected by around mid-2026. As any new regulations would need to be consulted on, it would seem that regulations would not be made until the first quarter of 2027, at the earliest.

Regulations must be made before the new surplus powers under the Pension Schemes Bill come into force. The Regulations will include restrictions on the exercise of the power unless an actuary of a prescribed description is satisfied that prescribed conditions are met in relation to the value of the scheme’s assets and liabilities and as to the extent of the required surplus . It remains to be seen whether the trigger level for repayment of surplus will be set on a low dependency or buy-out basis.

In summary, it will likely be a long time before the new surplus powers can be utilised. For any schemes that are either in wind-up are considering winding-up in the next couple of years, the new surplus powers may have limited use in practice. However, for ongoing schemes and those schemes looking to run-on which may not have a valid section 251 resolution or existing power under the rules, trustees and employers of such schemes are likely to await the new powers with keen anticipation.

Questions

If you have any questions around the new Pension Schemes Bill or allocation of scheme surplus, we would be happy to discuss.

Meet the team:

1. 

   • Justin McGilloway

   • Partner
   • Pensions & Employee Benefits

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2. 

   • Paul Ashcroft

   • Senior Associate
   • Pensions & Employee Benefits

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