Government to facilitate access to pension surpluses

The Government has announced that will ease restrictions around the use of surplus in defined benefit schemes, in a bid to drive UK growth.

The previous Government proposed changes to the surplus regime in a 2024 consultation, Options for Defined Benefit schemes. It appears that the new Government is minded to proceed with two of the changes which were proposed:

• The repeal of legislation which, in some cases, means surplus can be refunded only if trustees passed a suitable resolution before 6 April 2016.
• The introduction of a statutory override, such that the rules of DB schemes can be amended to allow surplus to be extracted where the trustees and the employer agree.

The Government has not said where it stands on other ideas which were floated in the 2024 consultation:

• A change to the funding test which must be met if a refund is to be paid to the employer.
• A simplified process for one-off member payments, so that lump sums can be paid from surplus without tax penalty.
• A Code of Practice or guidance from The Pensions Regulator, so that trustees can be confident about sharing surplus with the employer or members where it is safe to do so.
• Scope for schemes to opt for 100% PPF protection, subject to suitable safeguards and to the payment of extra levies.

The direction of travel will become clearer when the Government publishes its response to the 2024 consultation, which it plans to do in spring 2025.

The two changes currently envisaged will require primary legislation. The Government has not said whether measures will be included in the forthcoming Pension Schemes Bill.

Comment

Much is uncertain at present, and any changes will have a long lead-in time. However, employers and trustees who are currently formulating plans to use surplus may wish to take stock. One point to note here: there is no suggestion that the Government will allow employers to access surplus unilaterally, save to the extent that they can already do so. The announcement indicates that any distribution of surplus via the proposed new flexibilities will be subject to the consent of trustees. See above, however, as to the possibility of guidance from the Regulator, which might inform trustee decisions.

Looking ahead, a new surplus regime could drive changes in endgames and investment strategies. Large, well-funded schemes might seek to deliver benefits via run-on rather than buy-out, with the trustees investing a proportion of assets productively with a view to sharing emerging surpluses. Trustees will need to be satisfied that any associated repurposing of schemes can be squared with their fiduciary duties. Whether the Government will seek to clarify or redefine those duties, to encourage run-on, remains to be seen.