DWP publishes draft surplus regulations for consultation – paving the way for easier access to DB surpluses for sponsors and members

DWP has today issued a consultation on the widely anticipated regulations to make it easier for trustees to “safely” release surplus from DB schemes to employers, off the back of the Pension Schemes Act 2026.

The Government has previously estimated this could be worth up to £160 billion, to support employers’ investment plans and to benefit scheme members. The regulations are expected to come into force from April 2027. TPR has also issued an accompanying statement.

The Pension Schemes Act 2026 contained a statutory resolution power to allow wide-sweeping changes to scheme rules to facilitate surplus release to employers, and an adjustment to the legislative test that the trustees must apply when deciding whether to release surplus – specifically removing the requirement that it is in the “interests of the members”, with trustees expected to fall back on their more general fiduciary duty.

The draft regulations add further detail on how and when surplus release will be allowed, and are largely in line with what was anticipated following the DWP response to the DB options consultation just over a year ago. In particular:

• Surplus distribution will be permitted above full funding on a low-dependency basis with no explicit margin in the law. This represents a significant change from existing law where surplus distribution is only permitted if the scheme is funded above buyout levels. Trustees will of course be able to consider whether a further funding buffer makes sense based on scheme circumstances, with fuller TPR guidance to follow.
• Importantly the measure is a scheme's own low-dependency basis as agreed for valuations in the new funding regime - increasing the significance and role of this measure.
• There will be conditions to allow a surplus release including: certification of the funding position by an actuary; employer consent for the release; and notification to members that surplus is being released.
• The Government isn't legislating on how surplus is being distributed. It will depend on the scheme's rules and the surplus could be used for the benefit of employers or members, or both. 

Alongside the draft regulations, the Pensions Regulator (TPR) has published a statement providing early views on the issues trustees should consider around surplus release. This covers key background but also thoughts on how to approach discussions and decisions around use of surplus in practice.

TPR comments on many factors to consider, including scheme rules, funding position, covenant and wider support, investment strategy, and plans around running on. There is also a good deal of commentary around how members may benefit from surplus release, with TPR saying they “anticipate both the employer and the members may expect to benefit from the release and that this will feature in discussions”. In this context it is noteworthy that in both case studies TPR illustrates, members also receive a share of the surplus.

It is expected that TPR will consult later this year on more detailed guidance to sit alongside the final regulations.

LCP Partner and Head of Endgame Innovation Jonathan Griffith said: “These proposals are a big step towards making surplus release a real option for DB schemes. Moving from a buyout test to a scheme’s low-dependency funding basis is a significant change and could bring much more surplus into scope.

“But this will not be a rubber-stamping exercise. Trustees and sponsors will still need to be comfortable that any release is appropriate, think carefully about the safeguards they want in place, and decide how and when any surplus should be used in practice.”

Commenting on TPR’s statement, LCP Partner Steve Hodder said: “It is helpful to see TPR setting out how these issues can be worked through in the real world, and how this will all start to look and feel for Trustees.

“It is interesting that TPR has chosen to show two case studies with 50% and 20% member shares of surplus. It's clear these aren't designed to be anchored to, and circumstances will of course vary, but TPR setting out clear examples can surely only help trustees on what can feel like one of the trickiest aspects of their decision making. Some sponsoring employers may feel these examples are less helpful!

“The case studies also demonstrate the real potential real world value to the UK economy of this policy change.”