At A Glance
- The government will make release of surplus from ongoing defined benefit (DB) pension schemes easier.
- The Pension Schemes Bill will allow trustees to amend their scheme rules to allow surplus release. It will also relax the statutory restrictions, including reducing the funding threshold which must be met for surplus payment to be released.
- Once the reforms are enacted, employers and trustees of DB schemes will need to consider the extent to which they can—and wish to—take advantage of the reforms. Employers may wish to approach the trustees of their scheme to discuss putting a policy on surplus extraction in place.
The government has announced reforms to allow for the easier release of surplus payments from ongoing DB pension schemes. Currently, a surplus payment may only be made from an ongoing DB scheme if, among other things:
- The scheme rules permit a surplus payment to be made, and a trustee resolution preserving that power was passed by 5 April 2016.
- The scheme is fully funded on the buy-out basis, and the surplus payment does not exceed the amount by which the scheme assets exceed the buy-out funding level (as certified by the scheme actuary).
- The trustees are satisfied that it is in members' interests to make the payment.
- Notice of the proposed payment has been given to members.
The recently laid Pension Schemes Bill will give trustees of ongoing DB schemes the power to modify their scheme rules to:
- Allow the trustees to make surplus payments to the employer, where they do not already have such a power; and
- Remove or relax any restriction imposed by the rules to make surplus payments to the employer, where the trustees already have the power to do so.
The Bill repeals the requirement to have passed a resolution by 5 April 2016 preserving any trustee power to make surplus payments to the employer.
The Bill also modifies the statutory requirements that must be met for a surplus payment to be made to an employer. The detail of the modifications will be set out in regulations (which have not yet been published), but the government has confirmed that they will include:
- Reducing the funding threshold which must be met for a surplus payment to be made, from full funding on the buy-out basis to full funding on the low dependency funding basis; and
- Amending the requirement for the surplus payment to be in members' interests, to clarify that trustees must act in accordance with their overarching fiduciary duties to scheme beneficiaries, which will remain unchanged.
Surplus payments will continue to be taxed at 25%. The changes are expected to come into force in 2027. (Read more about the Bill in our Legal Update on the Pension Schemes Bill.)
The government will also work with the Pensions Regulator (TPR) to develop and publish guidance with respect to DB surplus extraction. This guidance will reference a suite of options available to trustees to bring benefits to members from surplus sharing.
What Do the Reforms Mean for Employers of DB Pension Schemes?
Once the reforms come into force, trustees and employers of DB schemes will need to consider the extent to which they can—and wish to—take advantage of the relaxations. This will be a scheme-specific (and, ultimately, a trustee) decision, but the expected TPR guidance is likely to set out some general factors that should be considered.
TPR has recently published guidance on new models and options for DB schemes, which considers the issue of surplus in ongoing schemes, particularly in light of the planned reforms. TPR states that it would be good governance for schemes to have a policy on surplus extraction; conversely, a scheme being materially overfunded for a prolonged period—with no plan to distribute surplus—may indicate poor governance. Employers may wish to approach the trustees of their scheme to discuss putting a policy in place, either in anticipation of the reforms or once they come into force. (Read more in our Legal Update on TPR's guidance.)
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