Background
On 10 June 2026, the DWP published a consultation on the draft Occupational Pension Schemes (Payments to Employer) Regulations 2027 (“the draft regulations”).
In this response
General comments
We welcome the opportunity to respond to this consultation. As pension lawyers our expertise lies, among other things, in understanding the legal requirements underpinning, and the complexities of, the current defined benefit (“DB”) pensions landscape.
In addition to answering selected questions which are pertinent to our area of expertise, or which we believe could give rise to difficulties in practice for our clients, we have provided some general comments. We also responded to the DWP’s 2024 Options for DB schemes consultation (the “2024 consultation”) and we have referred to our response where relevant below.
Alongside the DWP’s consultation, HMRC has published “draft tax legislation” and a policy paper to pave the way for “authorised member surplus payment(s)” to be paid out of surplus funds, provided certain conditions are met. We are providing separate feedback to HMRC on these proposals. However, given the interaction with the DWP’s draft regulations, we have also commented on the draft tax legislation where relevant below.
Trustee decision-making
The draft regulations will specify the conditions which will need to be met in future when considering paying surplus to an employer from a DB scheme which is not winding up (referred to in our response as an “ongoing DB scheme”). Certain conditions under the draft regulations will likewise be relevant when considering paying an authorised member surplus payment under the draft tax legislation.
When exercising any power at their disposal, trustees must go through a two-stage process. First, can they exercise that power and, second, should they exercise that power. The proposed changes address the first step, but existing trustee duties are a key part of the second step.
Under section 37 of the Pensions Act 1995 (“PA95”) as currently drafted, trustees must be satisfied that a proposed distribution of surplus to an employer from an ongoing DB scheme is “in the interests of the members”.[1] (Our response to the 2024 consultation includes a summary of relevant case law regarding the distribution of surplus and the exercise of trustee duties.) Whilst existing legislation does not attempt to codify trustees’ broader fiduciary duties and trust law obligations, the reference to “member interests” serves as a useful prompt to help ensure that the wider context is taken into account.
We acknowledge the challenges presented by the current legislative framework and we support the aim of simplifying complexity. However, an advantage of the current reference to member interests is that it makes clear on the face of the legislation that a decision whether or not to pay surplus must be weighed carefully against the backdrop of trustees’ fiduciary duties. The DWP’s response to the 2024 consultation recognised the importance of this, confirming the intention to amend section 37 “to clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged” (at paragraph 23).
However, among other changes, the new framework under the Pension Schemes Act 2026 (“PSA26”) will remove all references to the need to exercise surplus powers in an ongoing DB scheme “in the interests of the members”. The draft regulations are likewise silent on this point.
That said, the new surplus provisions in the PSA26 are only exercisable at the trustees’ discretion. Mirroring this, the ministerial foreword to the consultation recognises that, as the “key decision takers”, trustees will need to “consider their long-term plans and the best interests of members”. Paragraph 3.10 of the consultation then goes on to note that the valuation of assets and liabilities “establishes a minimum threshold above which surplus may be released but that does not mean it has to be released at that level” (or, indeed, presumably at all). Finally, the Pensions Regulator (“TPR”) issued a statement alongside the consultation and draft regulations (designed to support surplus discussions between trustees and employers) which also discusses trustees’ broader duties.
Nonetheless, in the absence of any specific acknowledgement of trustees’ wider responsibilities in the legislation, there is a risk that surplus release could be viewed simply as requiring a series of procedural steps to be met.
This places an even greater emphasis on TPR’s proposed guidance to accompany the new surplus framework, which it is intending to consult on later in the year. It also reinforces the importance of trustees having access to appropriate legal advice, as well as covenant, investment and actuarial advice (which the regulations focus on) to help support them in their decision-making in agreeing to release surplus either on a one-off or ongoing basis. If not addressed in the regulations themselves, this will need to be flagged in some of the regulatory documentation.
Authorised member surplus payments
As part of the 2024 consultation, the Government noted its plans “to simplify the process under which trustees can make one-off payments to members…rather than permanently uprate benefits thereby increasing scheme liabilities” (paragraph 27). Such payments would currently be unauthorised under pensions tax legislation and therefore subject to a penalty tax rate. The pensions industry welcomes this new option but we are worried it is too constrained in relation to deferred members and that may take away from its use.
The draft tax legislation sets out the conditions which will need to be met to enable a new authorised member surplus payment to be made, a key one being that it cannot be paid until the member has reached normal minimum pension age (“NMPA”), or potentially earlier because of ill-health. The intention is that members below NMPA can likewise be awarded an authorised member surplus payment, provided it is not actually paid until NMPA. Such lump sums will then need to be revalued up to NMPA, in accordance with regulation 17 of the draft regulations.
The conditions for paying new authorised member surplus payments could give rise to a number of issues in practice, many of which could have a bearing on the draft regulations:
- as awards to members below NMPA will need to be postponed, trustees will need to ensure that there are sufficient funds available each time such a benefit falls due. Inevitably, this will have a knock-on effect on scheme funding, possibly requiring schemes to ring-fence relevant surplus funds
- as with other accrued benefits, there is always a risk (however remote) that if scheme funding levels dip in the future such benefits may not be paid in full. This could create difficulties for scheme trustees
- having to track new benefits until NMPA, alongside existing scheme benefits, will inevitably create additional administrative burden and complexity. Schemes will need to understand the interaction between surplus awards and other benefits, and the correct treatment of the awards in different circumstances (including on divorce and in respect of CETVs), and adapt systems accordingly
- communicating surplus awards to members below NMPA might prove challenging. For example, will awards need to be included in benefit statements and on pensions dashboards, etc?
- having to preserve sufficient funds to pay lump sums at a future date is also likely to give rise to a number of other regulatory considerations (see our response to question 15 below)
- finally, the draft tax legislation specifies the earliest point at which an authorised member surplus payment can be made. There is no upper age limit on paying a postponed authorised member surplus payment, and it makes sense for this to be decided by the trustees. In practice, it may be easier for trustees to make such a lump sum payable from the same age as the member’s pension, perhaps with an ability for the member to request it earlier. This would help avoid having to carry out separate communication exercises and payment processes with deferred members at NMPA and then again at scheme pension age. (See also our specific comments below in response to question 15 on the revaluation requirements set out in draft regulation 17.)
Given the above, schemes considering sharing surplus with members may ultimately find it simpler to provide increases to existing benefits for anyone yet to reach NMPA, as permitted under the current legislative and regulatory framework. Augmenting benefits in this fashion would not require a scheme to be fully funded on a low dependency basis as the new regulations would not be engaged. However, adopting a two-tier approach to surplus sharing could place the trustees at increased risk of member complaints (although the recent Pensions Ombudsman case of Mr E noted that, provided trustees considered relevant factors, they could pay pension rather than a lump sum out of surplus). As such, trustees are likely to stick with something tried and tested and pay additional pension.
Whilst it is up to the Government to decide on the conditions to place on the payment of the new authorised member surplus payments, we are concerned that the current age constraints could limit their uptake in practice.
As an alternative means of providing a simple process under which trustees can make one-off payments to members, might an alternative option be to allow a payment to all members (irrespective of age) subject to a material monetary cap? Any surplus lump sum exceeding this amount could then be subject to attaining NMPA. It is already possible to pay a small lump sum of up to £10,000 regardless of age (known as a “relevant accretion”) where further benefits are identified in respect of an individual following the transfer out from a scheme. Similarly, a lump sum of up to £18,000 can be paid to a member at any age (which extinguishes their entitlement to benefits) where the scheme is winding-up.
Imposing a monetary cap on any payments made prior to NMPA would help reduce any potential for abuse and, of course, payment of the one-off surplus lump sum would be subject to tax at the individual’s marginal rate. Furthermore, it would also open the option up to being used (as intended) to release surplus back via members or employers into the wider UK economy to aid in growth.
Guidance
The DWP’s response to the 2024 consultation confirmed that it would “work with TPR to develop guidance with respect to DB surplus extraction” to “facilitate trustee comfort” (see, for example, paragraph 23). The consultation, together with the recently updated workplace pensions roadmap, refer to guidance being produced by both TPR and the Financial Reporting Council (“FRC”), with the latter being aimed at the “relevant actuary”.
We assume that the guidance identified in the 2024 consultation is, in fact, the guidance which TPR is planning to consult on later this year. However, if the DWP is considering publishing separate non-statutory guidance on surplus alongside TPR, it would be helpful if its intended timing and scope could be clarified.
Specific consultation questions
Question 1: Draft regulation 2 defines ‘appropriate advice’. Do you agree with this definition?
It is unclear why the person providing appropriate advice would need to have knowledge and experience of the management of the liabilities (as well as the investments) of trust schemes in order to provide the valuation under draft regulation 6. We would expect the assessment of the liabilities to be covered by the actuarial assessment (draft regulation 5) rather than in the valuation, so the definition of appropriate advice may be unnecessarily restrictive and potentially difficult to meet in practice.
Question 2: Is the scope of the power sufficiently clear?
Draft regulation 2(2) provides, in relation to a scheme which has no active members, that “references to the employer have effect as if they were references to the person who was the employer immediately before the occurrence of the event after which the scheme ceased to have such members”. We query whether this is a sensible approach as it could result in some odd outcomes.
For example, in a scheme where the identity of the “employer” for the purposes of the Occupational Pension Schemes (Employer Debt) Regulations 2005[2] (“the Employer Debt Regulations”) has changed since it ceased to have active members under a flexible apportionment arrangement, as is permitted under those regulations, the “employer” would remain the previous employer rather than the new one. It might be better to “piggy-back” off the provisions under the Employer Debt Regulations in such circumstances.
Question 5: Do you have views on the proposed funding test, based on full funding on the low dependency funding basis?
The proposed funding test represents the minimum funding level needed before surplus can be released, subject to satisfying the other conditions and wider trustee duties, discussed in our “General comments” above.
In practice, how schemes approach use of surplus will depend on any powers available under the scheme rules, as well as the scheme’s specific circumstances. As the ministerial foreword to the consultation acknowledges, schemes may therefore take different approaches, “including phased release, support for scheme funding, or discretionary improvements for members”, with open DB schemes also having the possible option of lowering contributions (rather than releasing surplus).
In light of feedback, the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024[3] (“2024 Funding Regulations”) were revised so as to embed more flexibility into the requirements and to accommodate “appropriate risk taking” where “supportable”.[4] Whilst the definition of “low dependency funding basis” in draft regulation 2(1) is tied back to regulation 6 of the 2024 Funding Regulations, we:
- wonder whether there is sufficient flexibility to suit the range of circumstances of schemes which might be considering releasing surplus. In particular, is there a risk that the definition might limit the applicability to schemes which may have an allocation to growth assets?
- assume that the fact there is no direct link to “the low dependency funding basis” as set out in the scheme’s most recent statement of strategy is intentional.
Question 6: Do you have any views on the proposed payment process as proposed in the regulations, including whether it is workable in practice and sufficiently clear? Please provide details.
We welcome the simplification of the notification requirements which are being proposed when compared to the current process under section 37 PA95 and the “2006 Regulations”.[5] However, we have highlighted some areas in the proposed payment process where further simplification or clarification might be helpful:
- Target date: under the draft regulations, the notification to members must be given at least “three months” before the target date for payment to the employer. It is not clear to us what the consequences would be if the actual payment were made on a different date (including potentially an earlier date). To help clarify timings, should the drafting make clear that the “actual date of payment” should not be before the “target date” and should the member notification requirements then be pinned down by reference to the former not the latter?
- Notification to members: a simpler member notification seems to be being proposed compared to current requirements (for example, the draft regulations no longer specifically provide for members being able to request a copy of the relevant valuation).[6] Given this, we query whether the three-month notice period remains appropriate or whether it could be shortened. Shortening the notice period could help further streamline the payment process, particularly where a phased approach to surplus payments is being adopted (please see our comments at question 9 below). It would also be in keeping with other areas of pensions law where members are notified of a change but not consulted – for example, on a bulk transfer of benefits without consent where a one-month notice period applies.[7]
Question 7: Are the regulations clear on the process of obtaining actuarial certification and paying the employer within 5 working days?
We can see the need for the draft regulations to set a deadline for payment of surplus to an employer after the actuarial certification is given, ensuring the certificate remains as current as possible. However, the proposed timeframe of five working days seems very tight.
The potential consequences of missing the five-day window are significant, including tax consequences of making an unauthorised payment or needing to re-start the surplus process in its entirety. A longer period might be more manageable and reduce the likelihood of issues such as unforeseen administrative delays causing the timeframe to lapse inadvertently.
Question 8: Do you have any comments on the proposed 3‑year forward‑looking assessment in Condition 2?
From a legal perspective, while we can see the value of a forward-looking assessment, we have some concerns that the “at least as likely to” test may be difficult to apply in practice and could lead to difficult discussions between the parties involved in negotiating the use of surplus. Alternative wording (eg “is expected to…”) might make the test clearer.
The three-year period fits schemes’ typical triennial valuation cycles. We expect that, in many cases, surplus discussions / negotiations will be timed with the scheme’s valuation as part of the wider funding review. However, the three-year forward-looking assessment may be more challenging to provide where schemes are considering surplus payments at different points in the valuation cycle. A shorter forward-looking assessment period may provide more flexibility. If that period is shortened, in our view the draft regulations should include provision for additional safeguarding, eg a requirement for fresh “appropriate advice” to support the decision.
Question 9: Do you agree that the process proposed in the regulations is sufficiently flexible to enable a phased release of scheme surplus over a number of years, while preserving member benefits via certification of each individual payment?
We support the aim for the surplus framework to cater for a phased release of surplus. We expect this approach could have benefits for both trustees and employers by enabling parties to take stock of funding levels over a period of time in accordance with a scheme’s surplus policy, rather than committing to a larger “one-off” surplus payment.
As currently drafted, the proposed process appears better suited to one-off surplus payments. If the intention is to accommodate a phased release of surplus, some adjustments would need to be considered (please also see our comments at question 6 above).
For example:
- could members be notified once, at the start of a phased release of surplus, setting out the proposals including the maximum proposed amount to be released (or % of surplus at a moment in time) and the intended dates of payment? Notifying members of each individual payment in a series seems likely to increase the administration burden and the timeframe of surplus release. Providing all of the information “upfront” (including any proposed checks and balances) may be more effective
- it would be helpful for the draft regulations to provide expressly that the “provisional amount” acts as a maximum limit for the amount of surplus that can be released, so trustees may decide to pay a lower amount in the event of funding level changes over the phased surplus release period
- although we appreciate that the FRC expects to provide guidance for actuaries, it would be useful for the draft regulations to specify the timing of the actuarial assessment in relation to the actuarial certificate. We would expect trustees to obtain updated actuarial assessments ahead of each new proposed payment date as part of a phased surplus release, particularly if the release spans a number of years.
Question 10: Should earmarked schemes be included in the scope of these regulations?
We do not have any specific comments on earmarked schemes. However, whilst perhaps unusual, it is also possible for a surplus to arise in an ongoing defined contribution scheme. This may become more common given the increasing use of commercial master trusts (eg through reserve funds building up from employer contributions, particularly those made by salary sacrifice). Where an employer ceases to participate, commercial master trusts may wish to make such reserve accounts more readily transferrable directly to the employer, especially where they have built up solely from employer contributions.
Question 11: Do you think the notification requirements in regulation 11 are sufficiently clear?
Please see our comments at questions 6 and 9 above.
Question 12: Do you think the notification requirements in regulation 12 are sufficiently clear?
Should draft regulation 12(c) include the date of the actuarial certificate, as well as the effective date of the actuarial assessment, given the requirement in draft regulation 9(5) for the payment to be made within five working days of the date of the certificate?
Question 13: Are the proposed rules for sectionalised schemes and employer consent workable and clear?
Draft regulation 13(6) provides for employers in multi-employer schemes to nominate a person to act as their representative for consenting to the payment of the provisional surplus amount under draft regulation 9(4)(c). It is helpful to have this express provision allowing employers to act via a representative and we expect this is the approach that many multi-employer schemes will take.
Multi-employer schemes may have existing nominations, often set out in the deed of participation by which the employer joins the scheme (or in an exchange of letters between the employers and the principal company/employer), including nominations for scheme funding purposes under paragraph 2 of Schedule 2 to the Occupational Pension Schemes (Scheme Funding) Regulations 2005.[8] As things stand, these nominations will not automatically apply to the new surplus framework under the PSA26 and the draft regulations.
For some schemes, particularly large multi-employer schemes and those with non-associated employers, obtaining new nominations will be an onerous task. It would therefore be helpful if an existing scheme funding nomination could apply equally for the purposes of the draft regulations, including to the employer consultation requirements under draft regulation 8(2).
Question 15: Are the draft regulations clear on revaluation of deferred awards?
Under draft regulation 17, any prospective authorised member surplus payments will need to be revalued. As mentioned in our “General comments” above (see under “Authorised member surplus payments”), having to track new benefits until NMPA (and revalue them), alongside existing scheme benefits, will inevitably create additional administrative burden and complexity. As an alternative, might it be possible to leave it to scheme trustees to decide what allowance to make (when deciding how best to share surplus between members) where an authorised member surplus payment has to be postponed?
The revaluation obligations in draft regulation 17 seem to be pitched by reference to the member in question reaching NMPA, which does not seem to take account of the possibility of earlier payment because of ill-health. Is this correct? In addition, whilst the draft tax legislation sets out the earliest point at which an authorised member surplus payment can be made, actual payment may not take place until sometime later. This may be because the member needs to be traced or because payment is intentionally delayed so as to coincide with other scheme benefits. Whilst fully integrating authorised member surplus payments into the preservation requirements would greatly complicate things, the possibility of later payment does raise the question as to whether revaluation should continue beyond NMPA in certain circumstances.
Whilst we do not have any other specific comments on the drafting of regulations 17 and 18, we wonder to what extent the draft regulations also need to cater for the impact of other legislation on such awards (see also under “General comments – Authorised member surplus payments” above). Other examples here include:
- how such awards should be dealt with on divorce
- ensuring such awards are permitted by legislation governing formerly contracted-out schemes
- how they would be dealt with in the event that the scheme is looking to buy out benefits with an insurer, or if the DB scheme goes into winding-up in deficit, including under the statutory priority order and the Pension Protection Fund.
Question 16: Are the draft regulations clear on how deferred awards affect members’ statutory right to take a transfer value?
Please see our comments at question 15 above.
Question 17: Do you foresee any issues or concerns arising from proceeding without transitional provisions following the revocation of the 2006 Regulations? If so, please provide details.
Schemes considering surplus release will be subject to different considerations and time pressures depending on the circumstances of the scheme and the parties involved. The surplus payment process under section 37 PA95 and the 2006 Regulations is also time-sensitive, with different deadlines set out in legislation, including as regards member notification requirements. A wide range of advice must likewise be sought (eg from actuaries, covenant advisers and lawyers) and some negotiations will naturally take longer than others. This all means that forward planning is essential before embarking on a surplus release process.
Although the proposed change to the surplus regime has been well publicised and we expect that this issue would only affect a small number of schemes, we have some concerns that the absence of transitional provisions could conceivably impact certain DB schemes. Hopefully though any parties affected would make this known as part of the consultation process.
However, the lack of any transitional provisions places a greater onus on the need for as much certainty upfront regarding the implementation date for the new surplus framework (currently scheduled for 6 April 2027), and advance notice of any changes to that timetabling.
[1] Section 37(3)(d) of PA95
[4] Foreword to the Government’s response to the consultation on the draft 2024 Funding Regulations, January 2024
[5] The Occupational Pension Schemes (Payments to Employer) Regulations 2006 (SI 2006/802)
[6] Regulation 10(1)(d) of the 2006 Regulations
[7] Regulation 12(4B) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (SI 1991/167)
