Changes expected to take effect from April 2027 will make it easier for trustees of defined benefit (DB) pension schemes to release surplus back to employers and members. The framework for these changes was included in the Pension Schemes Act 2026 and the Government has now published a consultation on draft regulations setting out further details. The Pensions Regulator has also published a statement on the upcoming changes.
Trustees and employers of well-funded DB schemes should familiarise themselves with the changes and start thinking about the implications for their scheme and trustees specifically are encouraged to consider principles to apply in adopting a surplus policy.
Background
The Pension Schemes Act 2026 introduces a new overriding statutory power for trustees to make surplus payments to employers. Once the provisions are in force, trustees will be able to pass a resolution to modify their scheme rules to provide for surplus payments to be made to employers where the rules do not already allow for this. Trustees will also be able to remove or relax any existing restrictions on any existing power to release surplus that exists under their scheme rules.
The draft regulations set out the conditions that will need to be met for trustees to make surplus payments to employers.
What are the conditions for surplus release?
The draft regulations set out five conditions for surplus release to employers:
- Funding threshold: trustees may only pay surplus to the employer where the value of the scheme’s assets exceeds its liabilities on a low dependency funding basis, and the actuary is satisfied that this is as likely as not to remain the case for the next three years. Trustees must obtain an actuarial assessment, and the actuary must provide a certificate to that effect.
- Notification to members: at least three months before the proposed payment date, trustees must provide members with a written statement confirming that they have decided to make the payment, the proposed date and amount of the payment and, where applicable, that the trustees have decided to improve member benefits.
- Employer consent: the employer must consent to the payment of surplus. In the case of a multi-employer scheme, either the employers’ representative must consent, or, if there is no such representative, all employers must consent.
- Timing of payment: the payment to the employer must be made within five working days of the actuarial certificate being given.
- Notification to the Pensions Regulator: trustees must notify the Regulator within one week of the date on which the surplus payment is made. The notification must include details about the scheme’s funding level, the amount of the payment to the employer, and any improvements to member benefits.
What about surplus payments to members?
The consultation confirms that changes will be made to tax legislation through the Finance Bill 2026-27 to allow trustees to make lump sum payments to members as authorised member surplus payments. These payments will be subject to the same surplus funding test as employer surplus payments and will be restricted to members above normal minimum pension age (NMPA). Trustees will still be able to award authorised member surplus payments to members below NMPA, but such payments will need to be deferred until the member reaches NMPA.
The draft regulations include an amendment to existing legislation to ensure that deferred authorised member surplus payments are revalued during the period of deferment.
The Pensions Regulator’s statement
Alongside the consultation, the Regulator has published a statement providing its early views on the principles trustees should consider when releasing surplus, together with high-level illustrative examples of how trustees should approach surplus release now, and how this may change once the regulations come into force.
In relation to the question of whether members should benefit from any surplus, the statement notes that the policy intent is not to mandate the use of surplus for any particular purpose. However, the Regulator anticipates that both the employer and the members may expect to benefit from the release and that this will feature in discussions. In doing so, the Regulator suggests trustees might consider the extent to which members have contributed to the scheme; whether benefit provision has been reduced, capped or enhanced in the past; the impact of inflation on members’ standards of living and the extent of indexation provided through the scheme rules; and whether members have a reasonable expectation to share in surplus.
Next steps
The consultation closes on 2 September 2026. The regulations, the relevant provisions of the Pension Schemes Act 2026 and the changes to the tax legislation are all intended to come into force on 6 April 2027. Any release of surplus between now and that date remains subject to the existing regime.
The Regulator is expected to consult later this year on further guidance elaborating on the principles set out in its statement and the requirements set out in the regulations. The Financial Reporting Council is also expected to provide guidance for actuaries.
What does this mean for trustees and employers?
Trustees and employers of well-funded DB schemes should familiarise themselves with the proposed new regime for surplus release.
Employers should ensure they understand the extent of any surplus under their scheme and engage with the trustees on what approach to take. If surplus is to be released, employers can expect trustees to engage on the strength of the employer covenant and the extent of any protections that exist (or may be needed) to mitigate against the risk of a future reduction in funding levels. Trustees may also ask for some of the surplus to be used to improve member benefits. Subject to agreeing those parameters, however, there will be no restrictions on what an employer can do with surplus which is released or how many payments can be made.
Employers should factor these changes into their long-term strategies. The ability to access surplus – whether to reinvest in the business without the need for further external finance, support ongoing business costs, or return value to shareholders – may influence decisions about whether to pursue an insurance transaction or continue to run-on the scheme.
Meanwhile, trustees can expect that, if the sponsoring employer has not already raised the subject, the question of surplus release will arise in future. In order to anticipate any such discussions, the Regulator is encouraging trustees to consider putting in place a policy on surplus release, appropriate to the context of their scheme. Any such policy may need to set out the trustee’s position in relation to:
- benefit improvements for members in return for agreeing to pay surplus to the employer; and
- the level of downside protection (which may include an appropriate funding buffer) that needs to be in place, so as not to prejudice existing benefits.
For further information, please contact:
Claire Collier, Linklaters
claire.collier@linklaters.com
