New DB surplus flexibilities

At a glance

The Government has published a consultation and draft regulations setting out the new statutory route for DB pension schemes to more easily release surplus to sponsoring employers on an ongoing basis. The main focus of this package, which builds on the Pension Schemes Act 2026, is the new surplus-release framework under section 37 of the Pensions Act 1995. 

The key change is replacing the current buy-out threshold with full funding on a low-dependency basis, supported by actuarial assessment and certification and a structured payment process.  

The Pensions Regulator has also published a statement with its “early views” on the principles which pension scheme trustees should consider before releasing surplus. 

The Government is consulting until 2 September 2026. Subject to consultation and Parliamentary approval, the new regime is expected to come into force on 6 April 2027.

This News Alert examines these developments.

Key actions

For trustees

• Review the scheme rules to understand whether they already permit employer and member surplus payments, prohibit them, or are unclear. 
• Be aware of the scheme’s funding position on a low-dependency basis, and consider taking advice on the size of any buffer that may be appropriate before agreeing surplus release  
• When appropriate, develop a trustee policy on surplus release and member sharing, ensuring it is aligned with the scheme’s funding and investment strategy. 
• Consider when in the scheme’s journey it would be appropriate to negotiate surplus strategy with the sponsor, including using the new section 36B modification power if relevant. 

For sponsors 

• Identify whether any DB surplus could be available under the proposed low-dependency funding test. 
• Review the scheme rules and discuss with trustees whether a rule amendment may be appropriate. 
• Develop a clear business case for surplus release, including how any employer payment would be used, and evidence of continued satisfactory covenant support. 
• Engage early with trustees to negotiate on proposed amounts, timing, retained funding buffer and any member-sharing package. 

The detail

On 10 June 2026 the DWP published a consultation document and draft regulations covering new surplus flexibilities for defined benefit (DB) pension schemes. These principally concern the conditions which must be met for trustees of DB pension schemes to make a surplus payment to the sponsoring employer under section 37 of the Pensions Act 1995 (PA95), as amended by the Pension Schemes Act 2026 (PSA26) with the measures expected to come into force on 6 April 2027.  

The Pensions Regulator has also published a statement that provides their early views on the principles that trustees should consider when releasing surplus together with two high-level illustrative case studies.

The consultation reflects the long-discussed policy intent following significant improvement in DB funding levels in recent years. The Government says that around four in five DB schemes are now in surplus, with aggregate surplus estimated at around £160bn on a low-dependency basis. Its policy objective is to give trustees and employers more flexibility to use surplus where it is safe to do so, while maintaining member security as the overriding priority. It maintains the position of the trustees at the helm of any surplus release process. 

Existing legislation will remain relevant for schemes in wind-up, but the new framework will apply to section 37 surplus payments in ongoing schemes. 

This News Alert covers the proposed new regulations. The detail may change when the regulations and Regulator guidance are finalised.

Trustee power to modify scheme rules

PSA26 introduced a new section 36B into the PA95. This gives trustees a statutory power to modify scheme rules to allow surplus payments to an employer where the existing rules do not permit this, or where scheme-specific restrictions would otherwise prevent surplus release.

This is an important gateway provision. Many schemes have restrictive rules. However, the existence of a power to amend the rules does not itself mean surplus can be paid. Any actual payment must still satisfy the new section 37 conditions set out in the draft regulations.

New surplus release threshold 

The most significant change is the proposed funding threshold. 

Under the current regime, surplus release is broadly linked to a buy-out basis. The draft regulations move this to full funding on a low-dependency funding basis, aligning the surplus regime with the DB funding and investment strategy framework. 

Before trustees can proceed, they must obtain an actuarial assessment of the scheme’s assets and liabilities. The liabilities must be assessed on the low-dependency funding basis and can be carried out at any effective date that the trustees choose. Trustees must take appropriate advice on the asset value to be used. 

The DWP describes low-dependency funding as a prudent threshold, intended to ensure the scheme is expected to be able to pay accrued benefits over the long term without reliance on further employer support. It is not, however, a maximum release test. Trustees and sponsors will still need to decide how much headroom above that minimum threshold is appropriate for the scheme’s circumstances. 

Detailed payment process 

The draft regulations set out a staged process, which is illustrated in Annex C to the consultation. 

First, trustees obtain an actuarial assessment from the “relevant actuary” (usually the Scheme Actuary). This may be done as part of the normal actuarial valuation process or not. The trustees must specify the effective date and also arrange for an asset valuation.   

If this assessment shows that assets exceed liabilities on the low-dependency basis, trustees may decide a provisional amount for distribution to the employer. Before doing so, they must take actuarial advice and consult the employer on both the amount and proposed payment date (the target date). 

As at present, members must be given a written statement at least three months before the target date. This must now state that the trustees have decided to make a payment to the employer, the amount and target date, and whether any member benefit improvements are being concurrently awarded. It does not need to be given to deferred and pension credit members who the trustees do not hold a current address for and may be delivered electronically. This statement is for information purposes rather than being a consultation. However, trustees may wish to consider any responses before making a final decision to proceed. 

Final actuarial certification is then required. The actuary must certify that, after allowing for the employer payment, any known benefit improvements and any authorised member surplus payments, the scheme’s assets will remain above its low-dependency liabilities at the certificate date. The information that must be included in the certificate is appended to the regulations.  

There is also a new forward-looking test. The actuary must be satisfied that, at any point during the three years after the certificate is given, the scheme is at least as likely as not to remain above low-dependency funding after the surplus release and any associated member improvements or payments.  

The Financial Reporting Council (FRC) has also announced that they will be developing technical actuarial guidance to help scheme actuaries with this certification. 

Once the certificate is given, the employer payment must be made within five working days. This is a much tighter window than the current regime and is intended to ensure that surplus release is based on up-to-date funding information. 

Within one week of the surplus payment being made, trustees will need to notify the Pensions Regulator of the value of assets and liabilities on the low-dependency basis, the amount by which assets exceed liabilities, the effective date of the actuarial assessment, the amount paid to the employer, and details and value of any member benefit improvements or authorised member surplus payments. Current regulations only require notification that surplus has been released, and these extra details are being sought to provide increased regulatory oversight by the Regulator and to aid understanding of how surplus is being used across the pension scheme universe.  

Member outcomes 

The consultation makes clear that surplus release is expected to be capable of benefiting both employers and members. 

Most trustees can already use surplus to improve member benefits, for example through discretionary benefit enhancements.  

For trustees, this means that any employer surplus release discussion is likely to need to include an early and explicit conversation about whether, and how, members should share in the value being unlocked.

Tax and other DWP legislation 

The Government intends to make tax changes through the Finance Bill 2026-27 to permit direct “authorised member surplus payments” to members – in other words payments to members of surplus as a lump sum rather than just pension. Those tax changes are to be consulted on separately by HMRC and introduced alongside these proposals. 

The draft regulations also make consequential amendments to DWP legislation to support these new flexibilities. Of particular note here is that the regulations formalise the concept of a deferred authorised member surplus payment for those under Normal Minimum Pension Age (NMPA). 

Multi-employer schemes and exclusions 

The draft regulations contain specific provisions for multi-employer schemes. In broad terms, where a sectionalised scheme has separate sections with separate assets and liabilities, sections may be treated as separate schemes for the purposes of the new modification and surplus payment powers. Employer consent can be given by a nominated employer representative or, if no representative is nominated, by all the employers. 

Certain schemes are excluded. These include schemes with Crown guarantees or ministerial control over surplus or excess assets, schemes outside the scope of the section 37 framework, and DB superfunds. The Government says that separate provision for superfund surplus release will be made when the statutory superfund authorisation and supervision regime comes into force.

Pensions Regulator statement 

Alongside the DWP consultation, the Regulator has published a statement on the new DB surplus flexibilities. This sets out the Regulator’s early views on how trustees and employers should approach surplus release discussions ahead of the final regulations and supporting guidance. The final guidance is to be consulted on later this year. 

The Regulator emphasises that trustee independence is unaffected. Trustees must decide whether surplus release is appropriate, acting in accordance with the scheme’s rules and their fiduciary duties. The Regulator also states that trustees should not be placed under undue pressure, including pressure to change the trustee board simply to secure agreement to a surplus release. 

The statement encourages trustees to prepare now and recommends that they: 

• check whether they have a surplus policy; 
• ensure that their funding and investment strategy aligns with that policy; 
• identify key advisers; 
• consider whether the trustee board has the sufficient expertise for run-on; 
• have up to date information on low dependency funding level and investment strategy; 
• review data and administration quality; 
• engage early with the employer to understand its motivations; 
• negotiate the level of surplus release and consider the balance between members and the employer in sharing the surplus; and 
• ensure they are aware of the notification requirements to The Pensions Regulator and members. 

TPR also highlights a number of factors trustees should consider, including the scheme rules, funding level, planned length of run on, negotiating contingent assets, covenant strength, whether members should benefit, and investment strategy  

There are two case studies that are useful illustrations of TPR expectations. Notably, these both involve sharing surplus with members.  

Final word 

The expected shape of the new surplus regime is now quite clear. The Government wants well-funded DB schemes to have a practical route to release surplus, but only within a framework that keeps trustees in control and preserves member security. They also seem keen for members to benefit from this policy as well as employers, but this is not prescribed. 

For some schemes, this could materially change the endgame conversation. Run on may become more attractive where surplus can be used to support both members and employers, rather than remaining locked in until risk is transferred to an insurer or superfund and the scheme is wound up. The interaction of this new surplus regime with other legislation, in particular the upcoming superfund regime, is also worth keeping an eye on – with new options emerging for trustees and employers.  

What is clear is that the new regime is not a simple cash-extraction mechanism. Trustees will need to be satisfied on funding, covenant, investment risk, member outcomes and governance and even then, unless a scheme’s existing rules say otherwise, surplus payments remain subject to trustee discretion.