Pension Schemes Bill 2025/6: Releasing surplus from defined benefit schemes – what is changing and when?

Thursday 5 June was a landmark day for the pensions industry as a whole.  The publication of the Pension Schemes Bill and accompanying roadmap sets the flightpath for a period of radical reform over the next 5 years and beyond as the Government seeks to drive a fundamental structural shift in the UK pensions system.

Some of the most heavily publicised and eagerly awaited provisions in the Bill relate to changes to the rules around how defined benefit schemes who have accumulated more assets than they need to cover their liabilities can make use of this “surplus”, including when they are able to withdraw it from the scheme and return it to employers.  In this article we discuss those new provisions, setting out what we know so far about the new parameters for surplus sharing, identifying the missing details and highlighting some of the actions schemes can and should be taking to respond.

Background

Making better use of surplus DB assets has been a hot topic in the pensions industry for the past couple of years. You can read more detail on the background and policy considerations underlying the changes in our January 2025 article.

When writing in January, while the policy intention was clear, at that stage there were still a significant number of unanswered questions about how the Government intended to achieve its objective of making surplus release easier.  These included what the changes to the existing legal framework would be, what changes might be made to existing parameters for surplus sharing on an ongoing basis and what regulatory support and guidance there might be for trustees as to how to approach a decision to distribute surplus funds from an ongoing scheme.

The response to the “Options for Defined Benefit Schemes” consultation (that began in 2023 under the previous Government) was finally published on 29 May, and has been followed in short order by the draft Bill itself on 5 June. 

What do we know?

The provisions relating to surplus sharing changes are set out in Clauses 8 and 9 of the Bill.  Highlights include:

• Trustees will be given a new statutory power to modify their scheme rules.  A new section 36B will be inserted into the Pensions Act 1995 (PA95) to enable trustees to pass a resolution to modify their scheme rules to:
  • insert a power to make a payment to the employer out of scheme assets where there is no such existing power (s36B(2)), or
  • where there is already an existing power but it is subject to restrictions, to “remove or relax any restriction imposed by the scheme on the exercise of the power”
• The existing section 251 PA95 will be deleted.  This removes a historic quirk that required schemes to pass a resolution by 5 April 2016 in order to preserve existing powers to pay surplus monies to a sponsoring employer:
  • the intention appears to be that deleting the requirement in this way means existing powers to repay surplus that might otherwise have been lost as a result of failing to pass the required s251 resolution by the deadline are restored. 
  • new s36B(3) PA95 confirms that repealing s251 in this way will not affect the validity of a s251 resolution that was passed before the 2016 deadline (this is needed because s251 allowed the resolution to make certain modifications to existing powers). 
• The existing requirements in section 37 PA95 for surplus distribution are being amended:
  • the s37(3)(d) test that means a surplus payment to the employer can only be made where  “the trustees are satisfied that it is in the interests of the members that the power is exercised in the manner proposed” will be deleted;
  • according to the consultation response, this change is intended to “clarify for trustees that they must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged”. There had previously been some confusion about whether the statutory requirement to act in the interests of members required something different to the trustees’ fiduciary duty to act in the interests of the beneficiaries (which includes both contingent beneficiaries and sponsoring employers). 
  • the consultation response notes that under the amended provisions, “trustees will remain responsible for negotiating with sponsoring employers regarding possible benefits to members from surplus extraction” and that this arrangement “strikes the correct balance between giving trustees the flexibility to share surplus with the employer (where this is appropriate) and safeguarding member interests”.
  • new s37(2A) and (2B) will require any power to pay surplus to an employer to be exercised in accordance with regulations which, amongst other things, will require the actuary to be satisfied that “prescribed conditions” are met in relation to the value of the scheme’s assets and liabilities and to give a certificate before any payment can be made.  The regulations will provide for the basis on which those assets and liabilities are to be determined.

What is still to be decided?

Though the Bill gives us much more certainty regarding the shape of the future statutory framework for making payments outside of the scheme, there are still a number of key areas where detail is to follow or further consideration is being given:

• Threshold for surplus release

As set out above, regulations will give important detail about the threshold at which a surplus distribution can be made. These will be consulted upon but the consultation response indicates that the Government is “minded to amend the threshold at which trustees are entitled to share surplus with the sponsoring employer from the current buyout threshold to a threshold set at full funding on the low dependency funding basis”. 

This is on the basis that the low dependency basis is a “robust and prudent threshold at which to consider surplus extraction and aligns with the existing statutory regime, which requires trustees to target full funding on a low dependency basis”. It is notable that this is a lower threshold than any of the four thresholds proposed in the consultation (which began under the previous Government).

• Tax changes?   

In April 2024, the Government reduced the rate of tax payable on surplus funds returned to an employer from a DB scheme from 35% to 25%. 

The consultation asked what changes to the tax regime would support schemes in using surpluses to enhance benefits and the response notes many respondents advocated for a change to allow one off payments to members to be treated as authorised payments to scheme members. It was noted that other responses advocated for tax reductions / exemptions for employers in return for using the surplus paid to them for e.g. DC contributions (even where the DC scheme is in a separate trust).

The response offers no conclusion on either point, it notes that the DWP believes that “the pension tax framework is broadly balanced and fair” but says that the Government is continuing to consider the tax regime for surplus extraction. 

Speaking at an XPS webinar on 9 June (at which Richard Knight was also a guest speaker), Paddy Gavin of the DWP’s policy team was clear that the Government expects that members should benefit from surplus extraction as well as employers, albeit that the shape of any surplus distribution and how it is shared is a decision to be made at a scheme specific level between trustees and employer.  Mr Gavin also noted that the Government is still considering the tax position as part of wider policy development.

Of course, any tax changes would usually come in a Finance Bill so there is room for a little optimism that some amendments might still be forthcoming, particularly in relation to a new form of authorised payment for making a one-off lump sum surplus distribution payment to members as many respondents advocated for.

• Regulatory approach

An important part of the new DB surplus release regime will be the approach of the Pensions Regulator. Whilst the statutory changes will give trustees the ability to modify their scheme rules to include a power to distribute surpluses (or to remove restrictions on a power they already have), acquiring the power is only the first step in any surplus distribution decision.  Whilst we expect to see many trustees exercise the new modification power to give themselves the option to return surpluses this isn’t the same as making a decision about whether and how a surplus should be paid out.

At this second stage, regulatory guidance is going to be key, particularly in light of TPR’s moral hazard powers, which give it the power to intervene when certain events arise that could put the pension scheme at risk.  Since October 2021 those powers have included the ability to impose criminal sanctions – potentially for company directors, trustees and advisers – in relation to an act or failure to act that detrimentally affects, in a material way, the accrued benefits being received.  

We already have some indication from TPR in the new guidance it issued on 3 June on “New models and options in defined benefit pensions schemes”. In the chapter focused on running on DB schemes, in relation to surplus TPR says:

"In situations in which the scheme is likely to remain fully funded on a low dependency basis and there is no realistic risk of employer insolvency, it is unlikely that TPR would have reservations about the release, subject to you having considered any other relevant matter related to the circumstances of the scheme and the sponsoring employer".

However, we note that if the new surplus sharing framework is likely to set the threshold for distribution at low dependency, this does not easily dovetail with the current moral hazard regime which is framed around buy out.  Clear regulatory guidance will be crucial to support trustees in reaching surplus sharing decisions. 

For more on the interplay between the changing surplus release framework and the moral hazard regime please do read our earlier (pre Pensions Schemes Bill) article from February 2025.

When is it all happening?

Alongside the Bill, the Government has published a helpful roadmap document, to give schemes clarity as to when all of the various reforms are likely to come into force.  In the case of the changes to rules around surplus distribution the proposed timetable set out in the roadmap is as follows:

• Early to mid 2026 – Pension Schemes Bill receives Royal Assent
• Mid – late 2026 – Surplus flexibilities regulations consultation
• Late 2026 – Early 2027 – Surplus flexibilities guidance
• Mid – late 2027 – Surplus flexibilities regulations laid 
• Surplus regulations and guidance to come into force by the end of 2027

With the Government’s Growth Agenda so clearly front and centre when it comes to these reforms, and £160bn of surplus (calculated on a low dependency basis) currently “trapped” in DB schemes, its perhaps some surprise to see that the consultation on draft regulations on the detail (including threshold for distribution) isn’t slated for the legislative agenda until (mid) 2026, and that the proposed changes are unlikely to come into force before the end of 2027.

However, taken as a whole, the changes in the Pension Schemes Bill are so fundamental to the structure of how the market operates in the UK, whilst schemes (particularly those with surpluses they can’t access) may feel some frustration at having to wait just that bit longer for the long-trailed changes, it is reassuring that the Government is taking its time to get this right. 

Quoted in Professional Pensions on Thursday (5 June), in relation to the timing of the changes to surplus distribution rules, Pensions Minister Torsten Bell said “If trustees have got clear sight of what we're aiming to provide for them over the next three years, that's a big improvement over what they're used to dealing with… They can get on with all their internal processes, even if they are one of the schemes that doesn't currently have the ability to act until we've until we've legislated”.

Next steps

Notwithstanding that the new surplus sharing framework will not be in place until the end of 2027, there is no shortage of actions for pension scheme trustees and their sponsors in the meantime.  These include:

• Identifying your scheme powers (and obligations) in relation to surplus

What powers does your scheme have to release surplus on an ongoing basis or in a winding up scenario? Who can the surplus be paid to? Are there any restrictions on the exercise of the power that the new s36B PA95 power could allow you to remove? Are there benefits that are ripe for augmentation (e.g. non escalating pre 1997 benefits or less generous survivor benefits)?

Knowing the powers you have at the moment, and identifying any particular challenges in your scheme benefit structure, will put you in the best position to respond to the changing regime as it is implemented.

• Putting in place a policy in relation to surplus release

As trailed in this year’s annual funding statement and made clear in TPR’s 3 June guidance, TPR expects schemes to have a policy around surplus sharing in place for their individual scheme. Trustees should consider how they would approach any requests from the employer to distribute surplus.

• Strategic planning

Collaboration between trustees and sponsor when it comes to scheme strategy is key. With the reforms in relation to surplus sharing, together with TPR’s new endgame guidance and the fledgling DB superfund market the DB landscape is changing – is your end goal still the best fit for your scheme? 

If you have any questions about the new Pension Schemes Bill, or about the law around distribution of surpluses and how it is changing, please do contact Richard Knight or your usual Burges Salmon pensions team contact.