PSA26 surplus law changes – what happens next?

On 29 April 2026, the Pension Schemes Bill received Royal Assent, which, from a defined benefit scheme’s perspective, means that important changes to the law around how and when surplus can be distributed from an ongoing scheme are now on the statute book. However, given the changes are not yet in force, we ask, what should trustees be doing now, and what happens next?

Pension Schemes Act 2026 measures: a reminder

The PSA26 makes a number of changes to the existing legal framework in relation to payment of surplus from ongoing schemes:

• Removing the “rules lottery”: section 9(1) of the PSA26 will add a new s36B to the Pensions Act 1995. This will give trustees a new power to modify scheme rules should they need to, to introduce the ability to pay out surpluses on an ongoing basis, or to relax or remove restrictions on an existing power.

• Removing the s251 resolution requirement: a quirk of previous legislation, which required schemes to pass a written resolution before 6 April 2016 in order to preserve surplus release power will be removed by s9(2).

• Changing statutory requirements: the “member interest” test for surplus release in s37 PA95 will be removed. The common law trustee fiduciary duty to act in the best interests of beneficiaries of course remains; removal of the additional s37 statutory requirement is intended to clarify that there is nothing additional over and above this that applies particularly to surplus release decisions. 

When will the changes come into force?

A consultation on regulations to flesh out the PSA26 changes to surplus release requirements is expected imminently, one of the first sets of secondary legislation to be published under the PSA26. The latest updates suggest that this will be accompanied by a statement from the Pensions Regulator, with a consultation on detailed regulatory guidance to follow later in 2026.

The regulations are expected to provide clarity on key measures including the funding threshold at which surplus release will be permitted – the Government has previously indicated that it is “minded” to set the threshold at the low dependency basis. This would be a material change from the existing threshold, which requires full funding at the more prudent buy out level.

The workplace pensions roadmap published alongside the Bill in June 2025 indicates that the new surplus release will come into force in the course of 2027. An updated version of the roadmap is expected to be published in the coming weeks and will hopefully provide further clarity on timescales.

Are we expecting other changes?

In the November 2025 Budget, the Chancellor announced that changes would be made to tax legislation to make it easier to make direct distributions from surplus to members (or other beneficiaries). 

At the moment, existing tax rules make it difficult to share surplus with DB members, other than by way of a discretionary increase or augmentation of pension benefits. Because increases and augmentations add to the scheme’s ongoing liabilities, the cost of which will fluctuate over time, both trustees and employers can be more reluctant to award them. The rationale for the proposed tax change is that allowing schemes to make a one-off lump sum payment from surplus to members would make it easier for schemes to agree to because it is a fixed cost. 

HMRC newsletter 175 (published in November 2025) confirmed that “where permitted by scheme rules and subject to trustee discretion”, such payments will be “treated as authorised payments, and taxed as pension income at the individual’s marginal rate of tax”. Schemes will also be required to meet funding requirements (the scheme must be in surplus on the same funding basis as applies to payments to employers) and the member will have to be above the Normal Minimum Pension Age.

HMRC’s newsletter confirmed that this will be legislated for in the next Finance Bill (2026-27) and it is intended that the change will take effect from 6 April 2027.

It is not yet clear whether the change will apply only in relation to payments from surplus in an ongoing scheme or whether the ability to make direct payments to members from surplus will also be available in a winding up context.

What is the Pensions Regulator’s position?

The Pensions Regulator has issued a couple of helpful updates on the subject of surplus over the past year:

• Options for defined benefit schemes guidance 

Published on 3 June 2025, this guidance specifically addresses the run-on model, which of course has as a key benefit the ability to generate surplus for the purpose of improving member benefits, funding DC accrual and / or paying monies to the employer. It outlines key considerations for trustees considering run-on but also identifies specific issues to consider in relation to surplus and the PSA26 changes. 

• Annual funding statement 2026 

Published on 6 May 2026, this document notes that TPR intends to publish a statement “providing early views on the issues trustees should consider around surplus release” at around the same time the DWP publishes draft regulations for consultation. It also promises that “later this year” TPR will consult on “more detailed surplus guidance to sit alongside the final regulations, which are expected to come into force in 2027”.

We are therefore expecting a further update from TPR any day on the subject of surplus, with a consultation on guidance to follow later in 2026.

What can and should trustees be doing now?

Building on the recommendations in TPR’s June 2025 guidance (to reflect that the changes in the Bill are now enacted but not yet in force), in our view (if they have not already done so) schemes should:

• Be in active dialogue with sponsoring employers about the scheme’s journey plan, including whether running on and generating surplus is part of the scheme’s flight plan. Discussions should include consideration of how the trustees intend to approach future surplus distribution decisions; TPR is clearly keen that schemes adopt a collaborative approach to surplus but that trustees remain independent and employers do not exert undue influence.

• Put in place a written policy documenting the agreed approach to surplus extraction in your scheme – this is specified by TPR as an expectation and should include “details of how members and the employer are likely to benefit from the release”; 

• Set a funding level above which surplus extraction can be permitted – this may be different to the statutory basis (which of course remains at buy out level pending the changes being made by PSA26 and secondary legislation).

• Consider whether there are any amendments to their existing scheme rules that they may wish to make using the new s9(1) PSA26 power. This will involve an analysis of existing balance of powers in the scheme rules – how and when do your scheme rules permit surplus distributions to be made while the scheme is ongoing?

In our view, although not specifically addressed in the June 2025 guidance, a further key element to consider is a broader benefit and documentation audit. Once the surplus provisions in the PSA26 are in force schemes can expect increased focus from both employers and members on potential surplus sharing arrangements, particularly if changes are made to scheme rules that would make this easier.

However, before any surplus distribution decision can be made it is important that trustees have a clear understanding of the extent to which their scheme is over-funded. In other words, that they have confidence that their understanding of what the scheme benefits are is correct and that the benefits being paid are consistent with member entitlements under the scheme documentation. As recent case law demonstrates (not least the Virgin Media decision and associated s37 compliance uncertainty), documentation issues can result in significant increases to scheme liabilities. 

Similarly, it is important that scheme data is accurate and complete; this is a key area of focus for TPR this year, particularly in the run up to dashboards going live. Schemes need to know who their members are and that they are receiving the correct benefits if they are going to consider making surplus distributions to a cohort within their membership.

Next steps

We await the draft DWP regulations and TPR’s accompanying statement, as well as the updated workplace pensions roadmap. 

However, as set out above, there is no shortage of actions trustees can, and indeed should, be taking in advance to put their schemes in the best possible position to respond to the changes. As TPR’s June 2025 guidance highlights, material over-funding for a sustained period with no plans to distribute the excess to members or employers is unlikely to be in the best interests of members, and may indicate poor governance.

We are very well placed to assist schemes and their sponsors with all aspects of journey-planning, including surplus considerations so please do get in touch if you would like to discuss any of the issues or actions outlined in this article.