Government consults on new rules for release of surplus from DB schemes

Following the surplus release framework set out in the new Pension Schemes Act 2026, the government has now published a consultation on the detail of the new surplus flexibilities for defined benefit (DB) schemes which are intended to ‘unlock value’ for employers and scheme members. The draft regulations set out the new conditions that will need to be met before surplus can be released from ongoing DB schemes, with the changes due to apply from April 2027.

 As expected, the draft regulations confirm that the funding threshold that a scheme must meet before surplus can be paid to an employer will be lowered from buy-out to the new low dependency funding measure. Significantly, there is a new forward-looking funding test that will also need to be met with the scheme actuary having to certify that at any given time during the next three years, it is “at least as likely as not” that the scheme will continue to be fully funded on the low dependency basis.

 The consultation also confirms the government’s plans to amend the tax legislation to enable authorised lump sums to be paid out of surplus to members who are above normal minimum pension age from 6 April 2027. The government makes clear that it “expects [trustees] to consider how members may benefit from any surplus release”. While not going as far as mandating that surplus is shared, there does seem a slight shift with the expectation being trustees will need to consider if and how members should benefit too.

 Alongside the consultation, the Pensions Regulator has published a statement which sets out how it expects trustees and employers to approach discussions relating to the use of surplus (under the existing regime and the proposed new regime) and the factors trustees should consider, which include the support offered to the scheme by the employers and the extent to which members will benefit. It also contains guidance for trustees that are considering running their scheme on to facilitate the generation and release of surplus over time. The Pensions Regulator has said it will consult on final guidance to support the new regime later this year.

Background

The government is introducing greater flexibility over how surplus funds held within DB schemes can be used. New powers for trustees to amend their rules to enable surplus to be repaid to employers that participate in their scheme are contained in the Pension Schemes Act 2026. These are due to come into force in April 2027.

As a reminder, the Act will enable trustees to modify their scheme rules to provide for surplus to be paid to a scheme employer while the scheme is ongoing, where their scheme rules do not currently allow this or where they contain restrictions that currently prevent this. The Act will also:

• remove the current statutory requirement for any return of surplus to be “in the interests of members” - although trustees will still be required to act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged, and
• remove the requirement for trustees to have passed a resolution under section 251 of the Pensions Act 2004 before 6 April 2016 for them to be able to make a payment out of surplus to an employer while their scheme is ongoing

The government is now consulting on draft regulations which will set out the process that must be followed and further conditions that will need to be met before a payment can be made to an employer out of surplus while a scheme is ongoing.

What will the process involve?

Based on the draft regulations, before a payment out of surplus can be made to an employer, trustees will be required to:

• obtain an initial actuarial assessment from the scheme actuary confirming that the scheme is fully funded on a low dependency basis (to enable the actuary to prepare this, the trustees will be required to inform the scheme actuary of the value of the scheme’s assets after having taken ‘appropriate advice’ from a person believed by the trustees to be qualified in financial matters)
• decide the provisional amount that they propose to pay to the employer (in consultation with the employer and having taken advice from the scheme actuary)

• notify members at least three months before the payment is due to be made that they intend to make the payment

• shortly before the payment is made, obtain a certificate from the scheme actuary confirming that the scheme is fully funded on a low dependency basis and that, in the actuary’s opinion, it is at least as likely as not the scheme will continue to be fully funded on this basis during the next three years

• obtain the employer’s consent to the payment

• make the payment within 5 working days of the date of the certificate, and

• notify the Pensions Regulator within one week of the payment being made

The regulations contain modifications for sectionalised schemes, which mean that individual sections will be treated as separate schemes for the purposes of these requirements.

Why will surplus be assessed on a low dependency basis?

The government is proposing to change the existing funding requirement relating to the repayment of surplus to employers, which requires a scheme to be fully funded on a buy-out basis. Instead, these regulations would allow a payment to be made where a scheme has a surplus on the new low dependency basis.

The government plans to make this change to provide greater flexibility and also because it believes that the low dependency funding basis is a robust and prudent threshold which aligns with the new requirements under the statutory funding regime (which apply to valuations with an effective date on or after 22 September 2024). These requirements aim to ensure that by the time a scheme matures, under most reasonably foreseeable scenarios, there will be enough resources to pay members’ benefits in full without any further support being required from the sponsoring employers.

However, the consultation makes clear that the low dependency funding threshold will be the minimum funding level a scheme must meet before a payment can be made. Therefore, it will be open to a scheme’s trustees to require a higher threshold to be met if they consider that to be appropriate in the context of their scheme. This is reflected in the Regulator’s statement which makes clear that trustees should consider the need for a financial buffer above low dependency.

Will members benefit?

Alongside the proposed changes to enable surplus payments to employers, the government is also planning to amend the tax legislation to enable authorised surplus lump sum payments to be made to members from 6 April 2027. The consultation confirms that these payments will be permitted:

• where a scheme is in surplus on a low dependency basis, and
• to members who are above normal minimum pension age (NMPA), which is currently 55 for most members (although this is changing to 57 from 6 April 2028)

The government says that trustees will still be able to award authorised member surplus payments to members below NMPA, but these will need to be deferred until the member reaches NMPA. Where deferred surplus payments are made to younger members, the draft regulations provide that these will need to be revalued during the period while they remain unpaid.

Once this package of changes has been introduced, it will be open to trustees and employers to agree to make one-off payments to members or to enhance members’ benefits as part of any agreement over the use of surplus. As is currently the case, it may also be possible to use surplus to benefit existing employees, by using it to cover (and potentially enhance) future employer contributions to its workplace DC scheme.

What does this mean in practice?

It is helpful that we now have more detail regarding the conditions that will need to be met before a payment out of surplus can be made to an employer once these changes are introduced. The Regulator’s statement is also helpful as it sets out the factors it expects trustees to consider where an employer requests a repayment of surplus. The Regulator also encourages trustees to put in place a policy on the use of surplus within their scheme.

It will be interesting to see whether scheme actuaries consider the new forward-looking test to be one that is workable in practice. We note that actuarial guidance will be published on how this test is satisfied.

Some schemes are able to make repayments out of surplus to employers now, based on the law and their scheme rules as they currently stand. However, many are unable to do so before these new flexibilities are introduced.

Where a scheme is fully funded on a low dependency basis (or better) and it is currently prevented from making a payment out of surplus to an employer it is likely that will change from 6 April 2027. However, any decisions relating to the use of surplus will need the approval of the scheme’s trustees. Therefore, any employers that would like to make use of this new flexibility should engage with their trustees and discuss the options that will be available to them.

What happens now?

The consultation on the draft regulations closes on 2 September 2026. We will be scrutinising the regulations and feeding back any issues through the consultation process.

We can expect final regulations to be published in time for them to be introduced in April 2027. The Regulator has said that once the DWP has responded to the consultation on the new regulations (which is expected to be later this year), it will consult on supporting guidance.

The legislation which will allow authorised surplus payments to members is due to be included in the Finance Bill 2026-27 and it will be consulted on as part of that process ahead of its planned introduction in April next year.