Surplus Flexibilities – details published on release of surplus to employers

As set out in our prior Pension Schemes Act 2026 update, the PSA26 broadens the scope for how surplus in ongoing defined benefit (DB) pension schemes may be used more flexibly from 6 April 2027. It provides the long-awaited framework for surplus distribution to employers, introducing a statutory override enabling trustees to modify their scheme rules to allow them to distribute surplus even where the scheme’s trust deed and rules do not currently expressly permit this.  

Whilst the requirement under s37 of the Pensions Act 1995 that trustees are satisfied that their decision to release surplus is in the interests of the members will be removed by the PSA26 (when the relevant provisions come into force), trustees’ overarching fiduciary duties to act in the best interests of beneficiaries remains, ensuring a continued balance of considerations to ensure any surplus distribution is appropriate. With 4 out of 5 DB schemes now in surplus on a low dependency basis, how these surplus assets are managed will no doubt be of interest to trustees, employers and scheme members alike. 

The Occupational Pension Schemes (Payments to Employer) Regulations 2027 Consultation published

One of the first sets of draft regulations under the PSA26 has now been published for consultation by the Department for Work and Pensions (DWP), providing further detail on the framework and proposed safeguards for trustees wishing to explore the release of surplus funds to employers. 

The consultation will run until 2 September 2026, with implementation of the new flexibilities expected from 6 April 2027.

What steps will need to be taken before surplus can be paid to an employer under the draft regulations?

• Preparation phase
• Actuarial assessment
• Set provisional payment amount
• Set target payment date
• Notification to members (at least 3 months before target payment date)
• Actuarial certificate
• Make payment to employer (within 5 working days of actuarial certificate)
• Notify the Pensions Regulator (TPR) (within 1 week of payment)

We set out below further detail on each of the stages. The consultation paper also contains a helpful surplus journey illustration within Annex C.

Preparation phase

TPR’s statement, issued alongside the draft regulations, refers to a number of preparatory considerations for trustees ahead of any surplus release discussions, including: 

• Check what the scheme rules say about who could benefit from any scheme surplus and whether you have a surplus policy in place. If not, consider putting one in place and ensure you are aware of the notification requirements to TPR and members.
• Ensure that the scheme’s funding and investment strategy, including long-term objective, aligns with your surplus policy and if not consider amendments. Obtain up-to-date information regarding the level of funding on a low dependency basis.
• Start initial conversations with advisers on how they will support the trustees in determining whether to release surplus.
• Consider whether the trustee board has sufficient expertise to manage a scheme in run-on.
• Undertake a data quality review and consider expediting work on any outstanding projects such as GMP equalisation and remediation for past amendments. It is important that total scheme liabilities are known before assessing whether there is a surplus.
• Start engagement with the employer to understand their expectations around surplus distribution ahead of any negotiations – trustees should consider the balance between members and the employer.  The statement is clear that it is for the trustees to decide whether to use the new surplus flexibilities.
• Trustees should document discussions and considerations around surplus release to demonstrate the decision-making process and rationale.

Whilst not part of the formal legislative requirements, the statement highlights some initial factors TPR would expect trustees to consider for surplus release:

• Consider the level of buffer above low dependency. Whilst not in the regulations, TPR clearly expects a buffer to be retained, noting this would protect against downside scenarios and could be used for future surplus generation. This buffer should be considered in the context of the investment strategy and employer covenant.  The statement also expects trustees to consider the planned length for running on at the outset.
• TPR notes that negotiating contingent assets as part of surplus release discussions may be particularly useful if the scheme is funded above low dependency but not at a full buyout level. 

Actuarial Assessment

Trustees must obtain an actuarial assessment before any payment can be made. Helpfully this can be as part of a valuation cycle or ‘at any other time’.  The funding basis to be used for the assessment is a low dependency funding basis. This is a notable departure from the existing surplus payment requirements which are assessed by reference to the more prudent ‘buy-out’ or ‘solvency’ funding measure. Another notable change is the inclusion of a forward-looking element in the actuary’s assessment. Under the draft regulations, not only must the scheme be fully funded on a low dependency basis at the time the actuary assesses the position, but the actuary must also be satisfied that it is “at least as likely as not” that the scheme assets will continue to be equal to or greater than its liabilities (assessed on the low dependency basis) for the next 3 years.

Set provisional payment amount

Trustees must decide on a provisional amount for payment to the employer, which must be done after advice from the actuary and after consulting with the employer.  The consultation paper also sets out that the trustees may seek covenant advice to assess the reliability of the employer, investment advice or legal advice at this stage.

Set proposed payment date

Following consideration of the actuarial advice and employer consultation, trustees can then set a target date for making the payment (taking into account the member notice period detailed below).

Notification to members 

At least 3 months before the target date for payment, trustees must provide a written statement to members confirming the trustees have decided to make a payment to the employer, the amount and target payment date and, where applicable, that the trustees have decided to award improvements to member benefits. There are some exclusions for notifying deferred members/pension credit members whose current address is not known and for whom previous correspondence has been returned from the last known address.

The requirement is for notification, rather than any consultation, however where there is feedback from members to the notification the trustees’ continuing fiduciary duty means it is appropriate to consider any feedback received.  This stage could potentially extend any payment timetable whilst communications are considered. 

Actuarial certificate

For the surplus payment to be made, the actuary must provide an actuarial certificate and the employer must have consented to the payment. The actuarial certificate has a descriptive list of requirements for inclusion and the actuary must be satisfied that a range of conditions are met. This includes a surplus remaining on a low dependency basis after the payment to the employer and after allowing for any known future increase to the value of members benefits in connection with the employer surplus payment and any known future authorised member surplus payments. This suggests that payments to an employer are expected to be considered alongside some form of corresponding benefit to members, which is consistent with TPR’s statement.

As highlighted above, a forward-looking element is also introduced into the funding test for surplus release; for a three year period from the date of actuarial certificate there will ‘at least as likely as not’ be a surplus on the low dependency basis. There is no further detail on the level of buffer which may be appropriate to retain, or what ‘as likely as not’ means in practice. The Financial Reporting Council has confirmed it will develop technical actuarial guidance to help scheme actuaries certify that surplus payments to employers meet the legislative requirements.

Make payment to employer 

The payment must be paid to the employer within 5 working days beginning with the date that the actuarial certificate is given. This is a tight deadline for the scheme administration accounting function which may have to deal with multiple approval steps through the payment process especially where the payment is large in value or it is the first time a payment has been made to the employing entity. 

Notify the Pensions Regulator

Within one week of the payment being made, trustees will need to notify TPR of the details of the scheme’s funding level and the payment. This is again a tight deadline. TPR is expected to publish guidance in Spring 2027 on what is to be included in that notification.

Further thoughts

The new flexibilities being introduced around surplus distribution are welcome, and moves the industry forward in enabling trustees to consider more innovative solutions where schemes are well funded. 

Whilst in theory ‘regular’ surplus payments are possible, in practice the draft governance requirements and timescales surrounding payments are material and the lead-in time to each payment looks to make frequent distributions more cumbersome than some will have hoped.  The need for actuarial certification and a 3-month notification to members before each payment is made will make this challenging to undertake more than annually unless the draft regulations are amended following the consultation process. 

We note the DWP’s intention to make separate provision for release of surplus from DB superfunds once the statutory authorisation and supervisory framework for DB superfunds comes into force – from that date surplus release from superfund schemes will be permitted subject to “different regulatory conditions and a stricter funding test”. This looks to be positive news; a consultation on the proposals is promised.

What do we know about surplus payments to members?

With regard to surplus payments to members through an authorised member surplus payment (a direct lump sum rather than a traditional benefit augmentation), further consultation on changes to the tax legislation is expected ahead of the April 2027 implementation date. The November 2025 budget announcement indicated that the intention was that only members who had reached Normal Minimum Pension Age (NMPA) would be eligible to receive such payments; however, in a welcome development the consultation advises that trustees will still be able to award authorised member surplus payments to members below NMPA, with payment then deferred until NMPA. 

Although the key changes to allow the authorised member surplus payments will be made in separate regulations, there is reference in the draft employer payment regulations to the revaluation provisions which will apply to member payments.  Where members are awarded an authorised member surplus payment before NMPA, the regulations provide for the value to be increased, as a minimum by reference to the final salary accrued pension revaluation method between the date of award and NMPA. The revaluation also applies before the member has left pensionable service.

Next steps

Feedback on the Occupational Pension Schemes (Payments to Employer) Regulations 2027 Consultation should be submitted before 2 September 2026.

Trustees should review TPR’s Statement and ensure they are in a good position ahead of any surplus release discussions.

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.

This article was written by Rachael Skuse