The consultation follows on from the Pension Schemes Act 2026 (PSA 2026) which has recently become law. Prior to the PSA 2026, only DB schemes which had an existing power to pay surplus to the employer in their rules and which had passed a certain type of resolution by 2016 could pay surplus to their employer. In addition, even where such a power did exist, it could only be used in situations where the scheme was in surplus on the buyout basis.
The changes introduced by the PSA 2026 have now given trustees a statutory power to modify their rules – either to introduce a power to make surplus payments to an employer where there wasn’t one before, or to remove certain barriers contained in existing powers. Importantly, the PSA 2026 also contained key safeguards on the use of surplus powers:
- Firstly, both the powers to modify the rules and ability to pay surplus to the employer are held by trustees who, when considering using these powers, must ensure they comply with their existing legal and fiduciary duties to act in the interests of scheme beneficiaries.
- Secondly, the PSA 2026 required regulations to be made which prohibit a surplus payment to an employer unless certain conditions are met in relation to the scheme’s funding level. It also stated that the regulations must also require actuarial certification and that members are notified before a payment is made. It is these draft Regulations that have now been published and are subject to consultation.
What do the draft Regulations say?
The draft Regulations spell out a number of steps which must take place both before and after a surplus payment is made to an employer.
Step 1: Commission an actuarial assessment
Before they make a decision to pay surplus to their employer, trustees must first obtain an actuarial assessment from their actuary. This can either be done as part of a regular valuation, or on a standalone basis. Under this assessment, the actuary would determine the value of the scheme’s liabilities on a low-dependency funding basis (LDFB).
Where this assessment shows that the value of the scheme assets is greater than the amount of its liabilities on a LDFB, the trustees may then decide to make a provisional payment to the employer (rather than, as currently applies, the scheme having to be in surplus on the buyout funding level). Before deciding on a provisional amount to pay, the trustees must take advice from the scheme actuary and consult with the employer about both the target date for, and the amount of, the payment.
Step 2: Notify members
Next, trustees would need to notify members in writing about the proposed payment of surplus to their employer. The notice must include the trustees’ decision to release surplus, state the intended date for payment and the amount that will be released. If trustees intend to award enhancements to members’ benefits, this will also need to be included in the notice.
The notice must be provided to members at least three months before the target date for the payment being made to the employer.
Step 3: Actuarial certification
The surplus payment can then only be paid if two conditions are satisfied, both of which must be confirmed in a certificate provided by the actuary:
- The First Condition is that value of the scheme’s assets will be greater than the amount of the scheme’s liabilities on a LDFB on the date of the actuarial certificate, taking into account any material developments between the date of the initial actuarial assessment (at Step 1) and the date of the certificate;
- The Second Condition is that the actuary must be satisfied that there is at least a 50:50 chance that the surplus funding position on the LDFB will continue for the next three years.
Assuming these conditions are satisfied, the surplus payment must then be made to the employer within five working days of the actuary’s certificate.
Step 4: Notify The Pensions Regulator (TPR)
Finally, trustees must notify TPR within one week of the payment being made, providing specified details of the surplus released to the employer.
Surplus payments to members
The consultation also confirms that measures will be included in the Finance Bill 2026-27 that will amend the pensions tax regime to allow direct surplus payments to members to be treated as authorised payments for tax purposes, provided the members have reached their normal minimum pension age (NMPA).
Under current tax laws, other than in very limited circumstances, it is not possible to use surplus to make direct payments to members, and if trustees want to use surplus to benefit members they have to do so in other ways (for example by augmenting their pension or providing inflationary increases on pensions in payment that don’t currently receive any increases).
What does the DWP want feedback on?
Under the consultation, the DWP now seeks feedback from industry stakeholders on the draft Regulations. In particular, comments are invited on whether the LDFB is the appropriate level for the funding test, whether the three-year forward-looking period is the right timeframe for the actuarial certification, as well as whether the member notification and TPR reporting requirements are sufficiently clear and workable in practice.
What are the timeframes?
The deadline for responding to the consultation is 2 September 2026. Subject to the consultation outcome and parliamentary approval, the draft Regulations will come into force on 6 April 2027.
TPR statement on surplus flexibilities
To sit alongside the consultation and draft Regulations, TPR has published its own statement on DB surplus flexibilities. The statement aims to support discussions between trustees and employers on surplus release options, and provides TPR’s early views on the principles that trustees should consider when releasing surplus, as well as some high-level illustrative examples of how trustees should go about surplus release.
Our view
The consultation and draft Regulations are the expected next step in the Government’s policy to unlock what they say is an estimated £160 billion of surplus in UK DB schemes for the benefit of employers and scheme members, as well as to support investment and growth in the wider economy.
It is clear from the consultation and draft Regulations that the Government has tried to strike a balance between allowing greater flexibility in a manner consistent with the policy aim, whilst ensuring that clear safeguards must be met before permitting surplus release to minimise any risk of eroding otherwise strong funding levels in DB schemes.
In anticipation of these changes, employers with well-funded schemes may wish to begin discussions with trustees about the potential for surplus release, while being aware that the framework may be modified following consultation. We can provide training to both employers and trustee boards to support them with these discussions.