Sackers welcomes DB surplus flexibilities but practical questions remain

Sackers today commented on the DWP consultation on DB surplus flexibilities “Unlocking Value for Employers and Scheme Members”.

From 6 April 2027, trustees of ongoing DB schemes will have new powers to release surplus. As a result, most of the current regime governing surplus payments on an ongoing basis will be repealed and replaced by the Pension Schemes Act 2026 and new regulations being made under it. The consultation on the new regulations closes on 2 September 2026.

Janet Brown, partner, commented: “We very much welcome the Government’s proposals to provide greater flexibility over the use of DB surplus. The new DWP regulations detail the conditions which will need to be met before surplus can be paid to an employer from an ongoing DB scheme. This includes the need to satisfy a minimum funding threshold which, as expected, will be pitched at the low dependency funding basis rather than the buy-out level currently in play. The legislation addresses the important question as to whether surplus “can” potentially be released. Unlike the current legislation which requires trustees to be satisfied that a proposed distribution of surplus to an employer is “in the interests of the members”, there is no specific recognition of the equally essential question as to whether trustees “should” release surplus. The absence of any nod to trustees’ wider responsibilities therefore leaves the legislation on its own being very procedural in nature. This will place an even greater emphasis on TPR’s proposed guidance on the new surplus framework (which it is intending to consult on later in the year) to reflect trustees’ broader obligations and the wider (albeit hopefully reduced once low dependency is reached) covenant picture. No doubt TPR will follow up on its 10 June statement and add flesh to the bones of the DWP regulations about the importance of trustees having access to appropriate legal, covenant, investment and actuarial advice (which the regulations focus on) to help support their surplus decision-making and avoid regret risk later on.”

Brown added: “Another area of concern is the way in which the new ‘authorised member surplus payments’ are being framed. Although subject to separate consultation, where the conditions for making a surplus payment to the employer are met under the draft regulations, the Government expects trustees to consider how members might also benefit. As things stand, the new authorised member surplus payment (the one-off cash lump sum) cannot generally be paid until the member reaches normal minimum pension age (“NMPA”). The intention is that members below NMPA can still be awarded such a payment, provided it is postponed until then (or earlier if in ill-health). Promising to pay a lump sum at a future date will inevitably place extra administrative burdens on schemes, who will need to ensure that funds are available as payments fall due. Younger active and deferred members may want jam today and not the promise of a share of the jam tomorrow.

“While welcoming the new one-off lump sum, we do think there are some significant practical issues to resolve, particularly around payments to younger members. Schemes will need to know what to do with the (revaluing) one-off cash lump sum for scheme funding purposes, disclosure requirements, in the event of a member’s divorce and, in a worse-case scenario, the scheme winding-up in the intervening period. Maybe HMRC, which will still get its tax on the cash sum, could see it paid earlier up to a new limit?”

A copy of the consultation response will be available on the Sackers website on Wednesday 2 September.