Pension surplus reforms - what you need to know

• Do they currently permit surplus extraction, and if so, with any restrictions? Explore the resolution route proposed under the new legislation, to introduce a power if none exists, or to remove or relax current restrictions.
• Do your rules specify how surplus can be used? If not, take advice and consider putting policies in place setting out how any surplus could be distributed and the conditions that would apply before surplus could be released (see also Governance, below)

• The government is ‘minded’ to change the threshold at which schemes can share surplus (from the current buyout basis) to being funded on a low dependency funding basis (actuarially assessed and certified). TPR’s analysis from autumn 2024 estimates that 75% of schemes are in surplus on this basis
• In line with TPR’s expectations, although there is no formal requirement to prepare a statement of strategy until preparing the first valuation under the new DB funding code, TPR notes that it is good governance practice for all trustees to set their scheme’s long-term objective – including their approach to surplus extraction – and to consider endgame strategies where relevant
• Subject to the legislation, the level at which surplus can then be extracted is a matter for the trustee to decide, having fully considered all matters relevant to the circumstances of the scheme and the sponsoring employer. This may be at a level above the low dependency basis, or released in stages over time.

• Use of the power will be at trustees’ discretion; the government notes that trustees ‘remain best placed to make decisions in the context of their individual scheme circumstances and their duties to scheme beneficiaries’
• However, while currently trustees must explicitly be satisfied that a payment of surplus to the employer is ‘in the interests of members’, proposed changes to the legislation mean that trustees are (only) required to act in accordance with their overarching trustee duties
• The government does not mandate how any extracted surplus should be used, and so trustees may need to balance the risks and their concerns against the competing benefits to members (which ‘must remain a key consideration’), sponsors (in terms eg of direct payments to it, or funding its DC contributions for other members) and the UK economy generally
• Trustees will be responsible for negotiating with employers regarding possible benefits to members. TPR’s new guidance is clear that it expects them to work collaboratively with sponsors; at the same time, it expects sponsors not to put trustees under ‘any undue pressure’.
• The parties will need to consider in advance how they might manage disagreement and deadlock.

• During this process, and once decisions are made, certain formalities will apply, including the duty to take appropriate advice, proper decision-making and effective documenting, and notifying members before and TPR when a surplus payment is made.

• TPR notes that it is good governance to have a documented policy on surplus extraction appropriate to the context of the individual scheme, including details of how members and the employer are likely to benefit from any release, and what the sign-off processes should be
• Trustees should take advice on the risks and opportunities that running on presents, including covenant advice
• Trustee boards should (as ever) be cognisant of the potential for conflicts of interest, particularly where trustees are also senior stakeholders in the scheme employer
• TPR mentions that where surplus may be used to fund the employer’s DC payments, trustees should ensure there are adequate skills, knowledge and understanding to ensure that the DC scheme is also well governed
• TPR also remarks that a scheme that is overfunded for a long period may indicate ‘poor governance controls’.

The rate of tax on surplus payments to employers will remain at 25% immediately (although the government will continue to consider the wider tax regime for surplus extraction).

• Outline legislation has now been published in the Pension Schemes Bill, with further detail to be covered by underlying regulations (due for consultation in 2026)
• Once the legislation is enacted, TPR states that it will consult and publish guidance on further considerations and factors that trustees may want to take into account when releasing surplus
• The government estimates that the regulations and guidance will come fully into force by the end of 2027
• Until the new provisions are commenced, the current rules (with their related restrictions) will continue to apply. The current legislation distinguishes between surplus return in ongoing schemes and those in wind-up – and this will continue under the new regime (TPR directs schemes to a useful recent surplus on winding-up case before its determinations panel), and there is no suggestion yet that this will change.