Defined benefit surplus: trustees in the spotlight

The DWP’s consultation on the draft surplus regulations signals a shift in how defined benefit surplus can be used, putting trustees at the centre of decision-making and creating new opportunities alongside a continued focus on benefit security.

The Department for Work and Pensions (“DWP”) has launched a consultation on the draft Occupational Pension Schemes (Payments to Employer) Regulations 2027 (the “Draft Regulations”). These draft regulations will underpin the new statutory framework introduced by the Pension Schemes Act 2026 (the “PSA 2026”), enabling trustees of defined benefit (“DB”) schemes to make surplus payments to sponsoring employers while the schemes remain ongoing. 

With many schemes now reporting strong funding positions (around 60% of schemes are now in surplus on a buyout basis and approximately 80% on a low dependency basis), attention has increasingly turned to whether surplus assets can be used more flexibly for the benefit of scheme members and employers. For trustees, the question is not simply whether surplus can be accessed, but how any decision to do so can be justified within the framework of their existing duties.

Why are these reforms being introduced?

Historically, releasing surplus from an ongoing scheme has often been difficult for trustees. Scheme rules either prevented surplus payments to employers entirely or imposed significant restrictions, while statutory requirements created further barriers to releasing surplus even where a scheme was well-funded.

The combination of the new statutory framework in the PSA 2026 and the Draft Regulations highlights the government’s objective of enabling surplus to be used more productively, while maintaining appropriate protections for members’ benefits. The reforms are intended to provide greater flexibility without compromising scheme security.

What does the new legislative framework do?

The Draft Regulations sit alongside the introduction of a new statutory power under the PSA 2026, enabling trustees to amend scheme rules to permit surplus to be shared with an employer while the scheme remains ongoing. In doing so, trustees would need to consider carefully how any amendment would affect the long-term security and operation of the scheme.

If brought into force, the Draft Regulations will recalibrate the threshold which must be met before trustees may share surplus, replacing the buyout funding basis under the 2006 regime with a “low dependency funding level test”. The operative test would look at whether the scheme’s assets exceed its liabilities, calculated on a low dependency basis. 

In practice, the Draft Regulations will require trustees to:

• obtain a certificate from the scheme actuary confirming that the value of the scheme’s assets is greater than the amount of its liabilities on a low dependency funding basis;
• consult with the scheme actuary and the employer on the proposed surplus amount and payment date;
• notify members of any decision to make a surplus payment to the employer at least three months before the target date for payment to the employer; and
• notify the Pensions Regulator within one week of any payment being made to an employer.

In completing the actuarial assessment, the relevant actuary must also be satisfied that the value of the scheme’s assets are “at least as likely as not to be greater than the amount of the scheme’s liabilities on a low dependency funding basis” for three years after the date the actuarial certificate is given. Taken together, these safeguards are intended to ensure that surplus can only be released where the underlying funding position remains robust.

So, what does this mean for trustees?

Although these changes represent an opportunity for employers, for trustees they also create additional responsibilities. Trustees will need to strike a careful balance between the long-term plans for the scheme, the interests of members and the potential advantages of a more flexible approach to surplus.

The DWP consultation is clear that trustees must comply with their existing duties to act in the interests of scheme beneficiaries. It also notes that the government expects trustees to consider how members could benefit from any surplus release when assessing whether to share surplus with an employer. Trustees must therefore consider the risks of sharing surplus while a scheme remains ongoing carefully, particularly where doing so could affect the security of members’ benefits.

The Pensions Regulator has also set out high-level principles and recommendations for trustees (with guidance expected later this year), noting that they should approach conversations with employers in good faith and work collaboratively. One such recommendation is for trustees to consider putting in place a surplus policy that aligns with the scheme’s funding and investment strategy.

While this may be helpful for some schemes (for example, where a decision has been made to run on a scheme rather than pursuing buy-out), trustees should consider the balance between any surplus policy in place and their duties to act in members’ best interests at any given time. Given the economic instability seen in recent years, a surplus policy put in place today may not necessarily remain appropriate in a few years’ time.

The Pensions Regulator’s recommendation may encourage employers to approach scheme trustees to create such a policy or to enter discussions about surplus sharing before the Draft Regulations come into force. Trustees should be prepared to engage with those discussions in good faith, while keeping their fiduciary duties, the interests of members and the potential impact of economic fluctuation firmly in mind.

Consultation on the Draft Regulations closes on 2 September 2026, with the intention that they will come into force in April 2027 following Parliamentary approval. 

If you would like to discuss any of the points highlighted above, please get in touch with your usual contact in the pensions team.

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