The new ongoing DB surplus release regime is taking final shape as the Government consults on draft regulations and TPR publishes a surplus statement.
Draft surplus flexibility regulations and TPR statement published
On 10 June 2026:
- The Government published a consultation on draft regulations (the Surplus Regulations) detailing the conditions that will apply to the payment of surplus to an employer of an ongoing defined benefit (DB) scheme from 6 April 2027. Of note is an expectation that, although the Government will not “mandate how extracted surplus is used”, trustees should “consider how members might also benefit from any surplus release”; and
- The Pensions Regulator (TPR) published a DB surplus flexibilities statement providing ‘early views’ on surplus release principles for trustees with an emphasis on early planning and relevant factors to consider. It includes two illustrative examples, one on the current regime and the second on the new one.
The new surplus payments to employer regime
The Surplus Regulations are being brought in under the Pension Schemes Act 2026, amending section 37 Pensions Act 1995 requirements governing the payment of ‘ongoing’ surplus to an employer. Recent scheme funding improvements and a desire for the pensions sector to increase investment in UK productive finance led the Government to introduce easements to address the ‘rules lottery’ that prevents some schemes from paying surplus to an employer at all and to allow rule amendments, where appropriate, for those that passed a ‘section 251 resolution’ and therefore do allow payments.
Under the new statutory regime:
- any power to repay surplus in a scheme’s governing provisions is rendered exercisable by the trustees;
- trustees can resolve to modify the scheme to include a power to pay surplus to an employer where there is no existing power to do so and to “remove or relax any restriction imposed by the scheme” on a trustee power to distribute surplus; and
- the power to pay surplus must be exercised in accordance with the Surplus Regulations.
The new regime is designed to:
- “strike the right balance between” member protection and trustee flexibility;
- “unlock value” for both employers and members; and
- provide ‘key safeguards’ on the use of surplus powers.
The consultation papers include a useful surplus journey illustration setting out the various anticipated stages and indicative timescales.
Which schemes are in scope of the new regime?
The new regime applies to DB schemes with a sponsoring employer that are subject to the Pensions Act 2004 scheme funding requirements and earmarked schemes (money purchase arrangements under which benefits are provided for individual members through insurance policies).
DB superfund schemes and ‘regulatory own funds’ schemes where the scheme underwrites funding risk are excluded. Superfunds will be subject to a separate surplus release scheme.
What conditions will have to be met under the Surplus Regulations before trustees can pay surplus to an employer?
Condition 1: Scheme must meet at least low dependency funding threshold
The Surplus Regulations reduce the funding threshold at which surplus can be released from buy-out to at least low dependency. Low dependency is only the minimum threshold. Before agreeing to any surplus distribution, trustees will need to decide what level of buffer is appropriate.
Before any payment can be made, an actuarial assessment must be carried out in accordance with the Surplus Regulations. This can be based on the latest actuarial valuation, but it does not have to be.
Condition 1 requires the actuary to certify that, after allowing for specified adjustments, the scheme remains in surplus on a low dependency funding basis at the point of release. Those adjustments include any material developments since the funding assessment, the proposed payment to the employer, any related increase in member benefits, and the future value of any authorised member surplus payment (the Funding Matters).
To ensure surplus release is based on current funding information, an employer payment must be made within five working days of the certificate being issued. The assessment is separate from the actuarial certification process.
Condition 2: Additional forward-looking funding test
An additional three-year forward-looking funding test is being introduced to ensure that any surplus release does not unreasonably jeopardise the scheme’s future funding position. The actuary must be satisfied that, taking account of relevant matters including the Funding Matters, scheme assets are at least as likely as not to exceed liabilities on a low dependency basis over that period.
Condition 3: Trustee decides ‘provisional’ amount to pay to employer
After taking actuarial advice and consulting the employer, the trustees will, if they decide to proceed with surplus release, agree a provisional amount to be paid to the employer. The amount remains provisional until the actuarial certificate is signed.
Condition 3: Notifying members
Members must be given at least three months’ notice of a proposed employer payment, including the proposed date and amount and, where relevant, any intended member benefit improvements. Notification takes place before the actuary provides final certification of the payment amount.
Condition 4: Notifying the TPR
Within one week of payment being made, the trustees must notify TPR in a prescribed manner of the employer payment.
Multi-employer schemes
There are specific provisions for multi-employer schemes so that sectionalised schemes can use the new section statutory modification power for each individual section.
Trustee decision-making and TPR’s surplus statement
Although the current statutory requirement for trustees to be satisfied that an employer surplus payment is “in the interests of members” is being removed, trustees will remain subject to their fiduciary and other legal duties. As TPR puts it, trustees “must be satisfied, in the proper exercise of those duties, that a surplus release is appropriate”. TPR’s statement provides further detail as to the preparatory steps trustees should take when heading into surplus discussions and a non-exhaustive list of factors TPR considers relevant to the trustee decision-making process.
Preparatory steps for trustees
TPR expects trustees to take a collaborative approach with the employer and to prepare early for potential surplus discussions. In practice, this will include reviewing governance arrangements (including conflicts and any existing surplus policy), engaging advisers across actuarial, investment, covenant and legal disciplines, and ensuring the trustee board has the appropriate skills for a run-on environment. Trustees should also obtain up to date funding and investment information, assess data and administration quality (including the status of GMP equalisation and other remediation exercises), and begin engaging with the employer to understand its objectives. Clear documentation of discussions and decision-making will be important given the potential for challenge.
Initial factors for trustees to consider
When considering whether to release surplus, trustees will need to act in accordance with their fiduciary duties and ensure that they reach decisions in a proper manner which includes taking account of relevant and disregarding any irrelevant factors. TPR refers to the following as relevant factors:
- Act in accordance with scheme rules and discretionary powers: trustees must direct themselves properly as to the law which requires a correct construction and application of the scheme’s governing provisions (and the statutory requirements governing surplus release).
- Assess surplus release and buffer levels: trustees must determine the level and timing of any surplus distribution, including an appropriate buffer above low dependency, taking into account scheme circumstances, investment strategy and covenant, and whether run on and release are “viable and cost effective”.
- Run-on planning is relevant: the duration of run-on will be relevant.
- Understand covenant: a full covenant assessment is not necessarily required, but trustees should have a clear understanding of the employer’s covenant and prospects.
- Negotiating contingent assets: agreeing contingent asset support as part of the discussions is noted as being ‘particularly useful’ if the funding level is between low dependency and buyout. Having contingent assets could assist if a downside event happens.
- Consider if members will share in surplus release: the Government has confirmed that it does not wish to direct how surplus is used and TPR also confirms that it does “not intend to direct trustees”. However, TPR does “anticipate that both the employer and members may expect to benefit from the release and that this will feature in discussions”. In assessing any member share, trustees may consider matters such as past member contributions, benefit design or changes, inflation impacts and member expectations.
Next steps
The consultation closes on 2 September 2026. Still to come is the following:
- New authorised member surplus payment: HMRC is going to consult on changes to allow direct payments of surplus to members in the form of a new ‘authorised member surplus payment’, providing a more flexible alternative to benefit uplifts or augmentation. Whilst such payments can apply to all members, they will only be payable from normal minimum pension age and will have to be revalued until then.
- TPR surplus guidance: TPR is also going to produce surplus guidance to support the new regime.
- FRC actuarial guidance: The Financial Reporting Council is also going to produce actuarial guidance on the legislative actuarial surplus certification process.
Overall, the new flexibilities will be welcomed by those schemes in a position to consider surplus distribution and, with TPR’s forthcoming surplus guidance, trustees should have a clear framework for ongoing surplus treatment under the new regime. TPR’s statement provides useful commentary for both the new regime and those trustees considering surplus release under the current provisions. Nevertheless, there remains uncertainty as to how things will play out in practice, including the extent to which schemes will make use of the flexibilities and how surplus may ultimately be distributed.