Industry calls for practical, proportionate approach to DB surplus flexibility

The pensions industry has welcomed government proposals to give well-funded defined benefit (DB) schemes greater flexibility to release surplus, but has called for a simpler and more practical framework that preserves trustee discretion and member protection.

The Department for Work and Pensions’ (DWP) 12-week consultation, launched in June, proposed a framework under which surplus could be released subject to a low-dependency funding test, a three-year forward-looking funding assessment, actuarial certification and member notification. The regulations are expected to come into force in April 2027.

Commentators have stressed that the low-dependency funding test should be a minimum condition for release, rather than an automatic green light for trustees to distribute excess assets.

Trustee discretion

The Independent Governance Group (IGG) said trustees should be able to hold additional funding above the statutory minimum where appropriate to protect members, while the Society of Pension Professionals (SPP) said decisions on the amount of surplus released should remain with trustees and reflect scheme-specific circumstances.

Louise Davey, trustee director and head of policy and external affairs at IGG, said that surplus should not be “simply viewed as a windfall”, but as the product of a funding and investment strategy designed to remain resilient over the long term.

She added: “Low dependency provides a sensible minimum threshold, but meeting it shouldn’t automatically mean surplus is available to use. Our own research suggests sponsors recognise that caution too, with two-thirds favouring a buffer above the legal minimum before surplus is used.”

Making the framework work

A key concern was whether the proposed process would prove unnecessarily burdensome, particularly for schemes seeking to make repeated or phased surplus payments.

LCP proposed an overarching framework under which further member notifications would only be required following a material change, while actuarial certification would remain necessary for individual payments.

Steve Hodder, partner at LCP, said the regulations should be “as practical as possible” to allow schemes to operate effectively in the real world. He added that guidance from the Pensions Regulator should set expectations around areas such as covenant and appropriate buffers, rather than making the regulations more prescriptive.

The Association of Consulting Actuaries (ACA) and SPP similarly called for greater flexibility around phased payments and for pension funds to be able to reduce a proposed payment without restarting the entire member notification process. Both also argued that the proposed five-working-day period between actuarial certification and payment should be extended.

Chintan Gandhi, chair of the ACA, said the framework should allow trustees to take a more cautious approach where market and funding conditions change, while making phased surplus release “a genuinely practical option”.

Jon Forsyth, chair of the SPP’s defined benefit (DB) committee, added that the greater flexibility around regular and phased payments, the actuarial tests and payment timetable would help ensure the new framework delivers its intended benefits without creating unnecessary governance burdens or other unintended consequences.

TPT Retirement Solutions also called for greater clarity around sectionalised and multi-employer schemes, including employer consent and surplus allocation at section level.

Ruari Grant, head of policy at TPT, said: “The regulations need to reflect the practical complexities of DB master trusts, sectionalised arrangements and multi-employer schemes. As innovative schemes and solutions continue to change the market, regulations must keep pace to ensure there is adequate flexibility for these schemes to fairly and sustainably support their members.”

Surplus use

The industry has also called for greater clarity over how surplus should be shared between employers and members.

Broadstone said the government would need to strike a balance between member protection and practical usability, while Aon research showed that many schemes have yet to decide how surplus will be used.

Among schemes in surplus intending to run on, 76% had not agreed how surplus would be shared between employers and members. Of those that had decided, 62% planned to distribute part of the surplus solely to the employer, 17% solely to members and 21% to both.

James Patten, partner in Aon’s UK endgame strategy team, said the findings showed “all to play for” as schemes consider the new flexibilities.

He added that most schemes had yet to settle on a surplus-release threshold, but where decisions had been made, the “vast majority” were adopting a threshold above the proposed low-dependency minimum.

There was also support for allowing surplus to fund contributions to separate DC or CDC arrangements. The ACA and TPT both raised the possibility of using surplus from closed DB schemes to support future pension provision.

As schemes prepare for the new regime, the central challenge will therefore be balancing member security with enough flexibility for trustees and sponsors to respond to their individual circumstances without creating unnecessary governance burdens.