UK pension surplus management reforms ‘exciting step forward’

Under the proposed changes, DB scheme trustees will be given a statutory power to modify their scheme rules to permit surplus extraction. The existing statutory requirement on trustees for any surplus payment to be in members’ interests will also be clarified so that trustees must act in accordance with their overarching legal duties to scheme members when repaying surplus. This is a significant departure from the previous approach that solely prioritised the protection of accrued benefits.

The announcement comes as the Department for Work and Pensions (DWP), in collaboration with the Pensions Regulator (TPR), responds to mounting pressure from industry stakeholders and the parliamentary work and pensions committee (WCP) to reform “outdated” surplus extraction rules. The reforms are designed to give trustees greater flexibility in determining whether it would be reasonable to return surplus assets to the scheme employers, while ensuring that scheme members’ interests remain protected.

Cameron McCulloch, pensions expert at Pinsent Masons, said: “The news will undoubtedly advance discussions that are already taking place about the future of DB schemes and whether to run on or proceed to buy-out. In some cases, these discussions have been on hold pending confirmation of the government’s position and now that this has been confirmed, trustees and employers can start to implement their plans.”

The government has dropped earlier proposals for a 100% pension protection fund underpin in exchange for a “super levy”, citing concerns over both the cost and potential moral hazard. Instead, the new plans will place the expectation on trustees to balance the interests of members and sponsors, with TPR maintaining oversight to ensure member protections are upheld.

Pensions expert Amie Bain said: “There are still challenges, particularly around ensuring that members’ benefits remain protected in the longer-term, but these are unlikely to be hugely problematic given the legal duties that already apply to trustees.”

The changes align with the WCP’s earlier recommendations, which criticised the “overly cautious” regulatory culture of DB scheme surplus management and called for a more “balanced approach” to reflect the improved financial health of many DB schemes.

McCulloch said: “This is the first piece of the puzzle, with more detail now needed on exactly how the changes will be implemented.”

Following the government announcement, TPR published new guidance for trustees and employers on DB scheme ‘endgame’ options. The guidance emphasises that all options need to be considered.

Bain said: “Buy-out will in many cases still be the preferred option, but the guidance is a helpful reminder that trustees and employers need to carefully consider the alternatives before agreeing an endgame strategy.”

The reforms are part of a broader government strategy to create “fewer, bigger, better run schemes” that can deliver stronger returns and boost UK investment. Alongside the DB surplus changes, the government has also published its final report on pensions investment and a consultation response on unlocking the pension market for growth. Key proposals include legislation requiring defined contribution (DC) providers to manage at least one “megafund” with £25 billion in assets by 2030, albeit with a transition pathway for smaller schemes, and measures to ease consolidation barriers for contract-based schemes.