Industry praises consultation on DB surplus release

The consultation – published today (10 June) – sets out the conditions that must be met to release surplus from DB schemes and introduces proposals including changing the funding threshold, replacing the current buyout-based test with a low-dependency funding test, as well as introducing a forward-looking funding test and strengthening the process of surplus release.

The Pensions Management Institute (PMI) said the move to a forward-looking test, rather than a single point-in-time assessment, "provides a more practical basis for planning".

Chief strategy officer Helen Forrest Hall said: "The PMI welcomes the publication of the draft surplus regulations for consultation. The proposals give trustees a clear and central role in determining when surplus can be used, with decisions grounded in low‑dependency principles consistent with the DB Funding Code."

She added: "The continued requirement for member notification maintains transparency, and the work alongside the Financial Reporting Council on supporting standards will help ensure consistency across the framework.

"This additional clarity will support schemes and employers as they consider their long‑term funding and surplus strategies. It is a constructive step that enables schemes to begin preparing for implementation with greater confidence."

Sensible framework

Society of Pension Professionals (SPP) DB committee chair Jon Forsyth said the draft regulations "appear to set out a largely sensible framework to make this policy work" but warned: "The devil will be in the detail and there is more to come with The Pensions Regulator's (TPR) guidance".

He added: "As the SPP has often said, with many DB schemes now in surplus, enabling trustees to safely share surplus funding with employers and members could bring better outcomes for both, while also potentially supporting investment and economic growth.

"In practice, trustees are likely to want to consider safeguards beyond what is in the law, as well as how much of any surplus should be used for the benefit of members. Looking ahead, it will be interesting to see how this area develops and influences DB strategy - including how trustees, sponsors and indeed members react to this policy in practice."

Broadstone head of policy David Brooks also welcomed the consultation, noting it is a "significant step in recognising that the DB landscape has changed materially over recent years".

He added: "Many schemes are now in a far stronger funding position than anyone would have expected a decade ago, creating legitimate questions about how surplus assets can be used more effectively.

"Providing greater flexibility around surplus extraction has the potential to create a more balanced relationship between sponsoring employers and pension schemes. If employers can see a clearer route to benefiting from future surpluses, it may encourage a greater willingness to support schemes over the long term and maintain investment in them where appropriate."

He also warned long-term member security "must remain the overriding consideration".

"Surpluses can disappear more quickly than they are created, particularly during periods of market stress, so it is pleasing that the proposals emphasise the importance of trustees retaining strong protections and clear safeguards before funds can be released.

"An important complementary aspect of these proposals is the emerging framework for how members themselves can share in scheme surpluses. Alongside greater flexibility for payments to employers, the changes make it easier for trustees to deliver tangible benefits directly to members, including one-off payments, discretionary benefit improvements such as enhanced indexation or other targeted enhancements where appropriate.

"This creates a clearer pathway for schemes to convert strong funding positions into visible value for members, rather than surplus remaining largely trapped within funding buffers. However, while the direction of travel is positive, it remains the case that member participation in any surplus distribution is not automatic and will depend on trustee judgement and scheme-specific negotiations.

"The effectiveness of the new regime will therefore hinge on how consistently trustees prioritise member outcomes when considering surplus release and whether emerging market practice develops towards more explicit and equitable approaches to sharing upside between employers and members."

Proposals could bring ‘much more' surplus into scope

LCP partner and head of endgame innovation Jonathan Griffith said the proposals are "a big step towards making surplus release a real option for DB schemes", adding moving from a buyout test to a scheme's low-dependency funding basis "is a significant change and could bring much more surplus into scope".

However, he warned: "This will not be a rubber-stamping exercise. Trustees and sponsors will still need to be comfortable that any release is appropriate, think carefully about the safeguards they want in place, and decide how and when any surplus should be used in practice."

Partner Steve Hodder added: "It is helpful to see TPR setting out how these issues can be worked through in the real world, and how this will all start to look and feel for trustees.

"It is interesting that TPR has chosen to show two case studies with 50% and 20% member shares of surplus. It's clear these aren't designed to be anchored to, and circumstances will of course vary, but TPR setting out clear examples can surely only help trustees on what can feel like one of the trickiest aspects of their decision making. Some sponsoring employers may feel these examples are less helpful!

"The case studies also demonstrate the real potential real-world value to the UK economy of this policy change."

Hymans Robertson head of DB scheme actuary Laura McLaren said: "The Pension Schemes Act created the legal foundation for greater surplus flexibility - but left much of the real substance to secondary legislation. With today's consultation on the draft regulations, we're finally seeing that detail start to crystallise.

"Full funding on a low‑dependency basis as the threshold for surplus extraction is no surprise; it's been well signposted. But the draft regulations now set out the framework trustees must follow before any surplus can be released, including actuarial certification and the required notifications to members and TPR.

"We support the core aim: strong member protection balanced with appropriate flexibility. But ongoing surplus sharing must be operationally workable. If trustees and sponsors see only governance drag, they won't view it as a viable long‑term option.

"That's why the practicalities matter. The proposed three‑year forward‑looking test needs to be proportionate. And because trustees must notify members at least three months before any payment, the full process effectively stretches to around six months. That's a long cycle – and it makes the current framework feel less suited to more regular or frequent surplus distributions.

"Ultimately, getting the detail right is essential to give schemes, trustees and employers the confidence to engage – while safeguarding better outcomes for members."

Trustees must make 'careful decisions'

Independent Governance Group head of policy and external affairs Louise Davey stated: "Today's consultation is a welcome step towards giving well-funded DB schemes more flexibility over how surplus is used. The improvement in scheme funding creates a real opportunity to support better member outcomes, strengthen employers and help schemes make more strategic decisions about their long-term future.

"But surplus is not simply a funding issue - it is also a governance issue. Trustees will need to make careful, scheme-specific decisions about whether surplus should be retained, released, used to improve member benefits, shared with the sponsoring employer, or help fund wider investment.

"The key will be giving trustees enough clarity and confidence to act, while maintaining strong protections for members. We also welcome the additional flexibility of authorised member surplus payments, which would give trustees another option to ensure members can benefit from surplus without increasing scheme liabilities. Moving from a buyout-based test to a low-dependency threshold may give some schemes more room to consider surplus, but it also raises the bar on decision-making."

She noted surplus "should not be treated as a windfall, but as an asset to be governed properly".

"With the right safeguards, robust advice and clear long-term objectives, these reforms could help schemes move beyond a narrow endgame debate and make better use of the funding strength now emerging across the DB market."

Aon partner and head of UK retirement policy Matthew Arends said: "We are strongly of the view that it is critical that surplus sharing is conducted in the right way in order to avoid generating additional risk to the pension system. We believe it is important that the regulations set out a minimum level of security that must be maintained in schemes but with a substantial degree of flexibility for scheme-specific circumstances to be considered.

"Ultimately the fact that surplus distribution requires trustee consent is the most important risk control in place. It enables trustees to consider the full range of relevant circumstances, including whether further security or funding structures are in members' best interests. Trustees will also be able to consider a potential direct distribution of surplus to members, a prospect that could be of great interest to the nearly ten million members of private sector defined benefit schemes in the UK.

"Further proposals aim to facilitate surplus sharing to members by enabling lump sums to be paid out tax-efficiently to members of retirement age. This will ensure that, where schemes are using surplus to also enhance member benefits, it can be done in a way that is immediately impactful and more meaningful for older members. It does however raise challenges for trustees about whether and how to share surplus evenly with younger members who under the proposals would not be able to receive tax efficient lump sums in the same way.

"What is certain is that this will sound the starting gun for many schemes to consider the potential use of pre-existing and new surplus. For many schemes, this will be a complex discussion touching on many areas of scheme strategy which could take a long time to consider and agree between parties. Many trustees and sponsors will therefore want to start reviewing these matters now, in order to ensure they can benefit when the final Regulations are expected to come into force in 2027."

Barnett Waddingham head of DB endgame strategy Ian Mills added: "The draft surplus release regulations are a welcome development and will provide schemes with much greater flexibility in how surpluses are used, which we expect many larger and less mature DB schemes to explore.

"Whilst some schemes will make full use of these powers, we expect the majority will take a more cautious approach - only releasing surplus on a buy-out or solvency basis. Importantly for trustees, the challenge will be balancing the opportunities created by surplus release against their ongoing responsibilities to members and the strength of the sponsoring employer covenant.

"Overall, we expect these reforms to accelerate the shift towards low-dependency funding and give schemes greater choice over how they reach their endgame. But whilst low-dependency funding is indeed a strong test, it is not no-dependency funding; the security of benefits will still be dependent to some extent on the sponsor's continuing covenant."

WTW head of trustee consulting Adam Boyes noted: "The government was right to stick to its guns and allow surplus payments where schemes are fully funded on a low dependency basis and expected to remain so. The new funding regime does not require further contributions once funding reaches this level, so allowing refunds from schemes with a surplus on this basis is symmetrical.

"Rather than setting a higher hurdle in regulations, the government and TPR are leaving trustees to consider the size of any buffer above low dependency that may be appropriate. Most schemes would have assets available for distribution even if they only released surplus on a buyout basis."

XPS Group partner and head of DB run-on Tom Froggett noted the broad principles of the DWP consultation "are as expected, but draft regulations now take us beyond the principles and firmly into the practicalities".

"A key consideration will be separating out the assessment of the level at which surplus is released from the actual mechanism of releasing surplus - in particular, it is crucial that the conditions around surplus release provide high levels of protection for members without making the actual mechanism for payment too onerous." 

The consultation closes to responses on 2 September 2026.