The Government has now set out how it proposes to facilitate access to surpluses in defined benefit (DB) pension schemes. The proposals are contained in the Government's response to the February 2024 consultation Options for Defined Benefit Schemes – the new Pension Schemes Bill provides the bare bones of the framework that will be used to implement these changes, but the detail is still to come via new regulations and in guidance from the Pensions Regulator (TPR).
The key point to note is that the hurdles for making payments to the employer are being lowered.
Funding targets that reduce the scheme's reliance on the sponsor's covenant have been widely used for many years, but the concept of low dependency has only recently been formalised into the funding legislation. The LDFB is not tightly prescribed in either legislation or in TPR's latest funding code and the Government has stressed that the new funding regime is intended to provide schemes with the flexibility to invest in a wide range of assets, even after they reach significant maturity. As such, there is scope for schemes to reach quite different views on what constitutes low dependency.
The new funding regime is, however, still in its infancy and it is too early to say how schemes are going to set their LDFB. If this measure is going to be used to assess whether surplus can be released from a scheme it could have consequences for how it's determined.
Where schemes have already spent a lot of time and effort in developing funding plans that are deemed to be in keeping with the requirements of the new regime, there might be a temptation to agree a LDFB at the weaker end of the range so that it doesn't infringe on the long-term funding target embedded in the existing funding arrangements. In cases such as this, trustees may wish to think again given the increased significance of the measure. Alternatively, they could consider positioning the LDFB carefully with the sponsor, so that it doesn't come as a surprise if they aren't prepared to release surplus without additional funding buffers on top of the LDFB. The flip side is that the sponsor may set its sights on cutting any fat out of the LDFB, so that it's set at the lowest possible level.
TPR has made encouraging noises for schemes to consider taking the Fast Track route, commenting in its November 2024 Fast Track submissions tests and conditions document, that they "are unlikely to engage" with schemes on valuations submitted via this route.
The positive messages for Fast Track have continued with TPR's 2025 Annual Funding Statement, which notes that they expect around 80% of schemes to be able to meet Fast Track, albeit with some schemes having to make changes that, in TPR's view, could be done at minimal or no cost to the sponsor.
In order to meet the Fast Track criteria, each assumption in the LDFB has to clear a hurdle set by TPR, with the minimum Fast Track compliant funding target largely being generic rather than reflecting a scheme's particular circumstances. The generic nature of the resulting LDFB could potentially make it less attractive if it's then used to determine the surplus that can be released. A scheme-specific basis is still possible under Fast Track, provided each assumption in isolation is at least as strong as the level required for Fast Track compliance, but it is yet to be seen to how common this will be.
The significance of the change could vary considerably from scheme to scheme:
Finally, it is worth bearing in mind that, in theory, there might be cases where the LDFB measure is stronger than the buyout solvency measure – for example, where the plan is to run-on the scheme and the reserve for running costs is very material, or where a particularly prudent approach is taken to setting the LDFB, The new legislation would appear to make the possibility of surplus sharing more difficult for schemes in this scenario.
All in all, there will be much for trustees and sponsors to consider as the surplus sharing regime comes into effect.
