Surplus flexibility regulations welcome but simplification and clarity needed to make the policy as “effective as possible”

LCP welcome the further detail on surplus flexibilities in the DWP consultation but are calling for simplification and clarity around some aspects of the proposed processes.

In their response to the DWP consultation on Surplus Flexibilities for DB Pension Schemes, LCP says that the proposed framework could be unnecessarily burdensome for schemes intending to release surplus regularly rather than as a one-off. Rather than requiring the full process, including a full length member notification period, to be repeated for every payment, LCP suggests that in such cases schemes should be able to establish an overarching surplus-release framework, with further notifications required only where there is a material change. Actuarial certification would still be required before each payment.

Other issues LCP have raised in their consultation response include:

• The regulations refer to “a low dependency funding basis”, rather than “the low dependency funding basis” set out in a scheme’s latest Statement of Strategy. If this distinction is intentional, DWP and TPR need to clarify the relationship between the two approaches, including the circumstances in which a surplus release assessment could be based on a different low dependency funding basis and how any such differences should be applied in practice.
• The additional flexibility to make authorised member surplus payments is welcome but the revaluation provisions should be clearer. As drafted, revaluation appears to always operate between the date of award and normal minimum pension age. This may not produce the intended outcome where a member dies before that age, or where a scheme chooses to pay the award after normal minimum pension age for legitimate administrative reasons.
• While the proposed 3-year forward looking assessment should provide members with comfort that all foreseeable scheme specific issues have been considered before surplus is released, the funding test should not inadvertently require detailed modelling in routine cases, as this could add significant cost and complexity without materially improving member protection.
• The requirement for payment to be made withing 5 days of certification is too short a window and should be extended to a more reasonable timescale to take into account operational issues such as banking arrangements and administrator timescales.

Steve Hodder, LCP Partner, commented: “Allowing schemes to use their surpluses has the power to improve member outcomes and also power economic growth. We are supportive of the regulations being as practical as possible to allow schemes to operate effectively in the real-world. 

“The TPR guidance will be important to add extra expectations around areas such as covenant, appropriate buffers and other key considerations for Trustees.  We believe that TPR’s guidance is the right place for this, rather than making the regulations more prescriptive, as this will allow TPR to govern emerging practices in a more flexible way and allow Trustees to take a proportionate approach for their own circumstances.”

Jon Forsyth, LCP Partner and Head of Pensions Developments added: “In a recent poll we held on this topic we found that more than nine in ten respondents expect to make use of the new surplus release flexibilities. This suggests surplus release could quickly become a mainstream tool for pension schemes, which means the regulations need to be workable and practical. Getting the governance right will be critical so schemes can seize the opportunities available while maintaining strong protections for members and avoiding unintended consequences.”