Surplus release: Draft regulations and Regulator’s statement

The Department for Work and Pensions (DWP) has published a consultation paper and draft regulations concerning the conditions that must be satisfied before payments can be made from ongoing defined benefit schemes to sponsoring employers. The regulations are intended to come into force on 6 April 2027. An accompanying statement from The Pensions Regulator (TPR) sets out factors for trustees to consider and provides two case studies.

Draft regulations

Provisions in the draft regulations include:

• Funding threshold: A payment can only be made to an employer where the relevant actuary (usually the scheme actuary) certifies that the scheme will still be in surplus on a low dependency funding basis after the payment is made and that the scheme is “at least as likely as not” to be in surplus on any given date over the following three years. The Government says it is “confident that full funding on low dependency is the right threshold for surplus extraction”. Under current legislation, schemes making payments to employers must remain fully funded on a buyout basis, which is usually a higher hurdle
• Process: Trustees would agree a “provisional amount” to be paid to the employer and a target date, which would be communicated to members at least three months in advance. The consultation paper explains that the amount is described as provisional because it only becomes final later; the draft regulations do not appear to provide for lower payments if funding deteriorates. Payments to the employer must be made within five working days of the date of an actuarial certificate confirming that the funding threshold is satisfied. Within one week of a payment being made, TPR would be told how much had been paid to the employer, how much surplus remained in the scheme, and whether/how members’ benefits had been improved. The consultation paper asks whether the regulations are flexible enough where the scheme wishes to make phased payments to the employer
• Lump sum member payments: As announced in the November 2025 Budget, the Government intends to make one-off payments to members above Normal Minimum Pension Age (NMPA) authorised payments for tax purposes, so that these can be used as a way of sharing surplus with members. The draft regulations require revaluation where a member below NMPA becomes entitled to receive such a payment in future
• Exceptions: Superfunds operating under the interim regime will initially be excluded from the power to make payments from surplus, with separate provision due to be made when the new framework comes into effect. The power to modify a scheme to permit payments to an employer will apply only to schemes, or parts of schemes, that do not have a Crown guarantee

TPR on factors for trustees to consider

Whether to release surplus is a decision for trustees and the Regulator says it does “not expect trustees to be placed under undue pressure, such as seeking to replace members of the trustee board solely to secure agreement to a release”.

TPR anticipates that “both the employer and the members may expect to benefit” from surplus release and that trustees should “start engaging with the employer as soon as possible”. Factors which TPR says trustees might consider when considering “the balance between members and the employer” include: the extent to which members have contributed to the scheme; past benefit reductions and augmentations; members’ reasonable expectations; and “the impact of inflation on members’ standards of living”. The two case studies involve employers receiving 80% and 50% shares, though TPR emphasises that these numbers are purely illustrative.

DWP notes that “trustees and employers will need to determine the level of buffer they consider appropriate above the minimum funding threshold”. The Regulator adds that any buffer could “potentially be used to facilitate the generation of future surplus” and should be considered in an integrated way, taking account of both investment strategy and employer covenant. According to TPR, “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”.

The consultation runs until 2 September. DWP will not consider responses received after that date. TPR will consult on guidance later this year, after the Government has published the outcome of its consultation.