30 May 2025
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Changes to law on pension scheme surpluses announced

To The Point
(2 min read)

The Government has announced changes to the law on pension scheme surpluses that will be included in its forthcoming Pension Schemes Bill.  It has also clarified its thinking on some related areas of pensions policy.  Here we take a look at the key changes and consider what difference they will make to pension scheme trustees and sponsoring employers.

The Government has announced changes to the law on pension scheme surpluses.  Its response to the "Options for Defined benefit schemes" consultation also clarifies current Government thinking on some related areas of pensions policy.

Key points announced in relation to surpluses are:

  • the Government will introduce a new power for trustees to modify scheme rules to allow for "surplus sharing" where existing scheme rules do not allow for this.  It will be up to trustees to decide whether to use this power and to negotiate with employers as to how members should benefit from surplus extraction;
  • the Government is "minded" to allow surplus payments to the employer where a scheme is fully funded on a "low dependency funding basis" as defined in the current scheme funding regime.  (Currently a scheme must be fully funded on a buy-out basis for a surplus payment to be made to the employer.)  Actuarial certification will be required.  Further detail will be set out in a consultation on regulations;
  • the Government will not mandate how extracted surplus is used;
  • once the relevant legislation has been enacted, the Pensions Regulator will produce guidance on surplus extraction.  The Government says it is imperative that trustees continue to make surplus extraction decisions in the context of other wider considerations including the potential for members to benefit and the strength of the employer covenant.  The guidance "will reference a suite of options open to trustees to bring benefits to members from surplus sharing";
  • the Government will amend section 37 of the Pensions Act 1995 which deals with surplus payments from ongoing schemes.  Currently trustees must be satisfied that a payment of surplus to the employer is "in the interests of members".  The changes will mean that trustees are simply required to act in accordance with their overarching trustee duties;
  • the Government will repeal the current requirement for trustees to have previously passed a resolution under section 251 of the Pensions Act 2004 in order to pay surplus to the employer;
  • the Government will consider the merits of introducing a statutory power allowing direct payments to members from surplus, but it does not commit to introducing this;
  • the rate of tax on surplus payments to the employer will remain at 25% for now, but the Government will continue to consider the wider tax regime for surplus extraction;
  • the required legislative changes in relation to surplus will be included in the forthcoming Pension Schemes Bill.  The Government has previously said that it hopes to introduce the Bill before the parliamentary summer recess.  Perhaps significantly, the proposals published today do not mention summer and simply refer to the Bill being introduced "later in 2025".  The Government does not commit to any timescale for bringing the changes into force.

Introduction of a public consolidator

The Government is actively considering the introduction of a public consolidator, operated by the PPF, for underfunded schemes and possibly other schemes are not well served by the current buy-out market (eg due to their small size).  The legislation to introduce a public consolidator will not be included in the forthcoming Pension Schemes Bill, but the consultation response goes into considerable detail about the potential design of a consolidator, indicating that introduction of such a consolidator is being actively considered.

Introduction of a statutory superfunds regime

The response confirms that the Pension Schemes Bill will include a permanent statutory regime for superfunds.

No opt-in 100% PPF underpin

The original consultation proposals had sought views on the introduction of a 100% PPF underpin on an opt-in basis.  The Government will not be proceeding with this measure.

Our thoughts

The changes announced today do not shift the balance of power in favour of employers in surplus negotiations.  However, they could be helpful in situations where current scheme rules do not allow a payment of surplus to the employer at all and cannot be amended to allow this. It is not clear how the proposed changes will operate where a scheme does have a surplus repayment power, but it is subject to restrictions which the trustees would like to remove.  The proposals to allow surplus payments when a scheme is fully funded on a low dependency basis will, if brought into force, allow surplus payments to employers in some circumstances where this would not have previously been permitted.  However, the Government has said it is "minded" to have this as the funding threshold, giving it some "wiggle room" to change its mind. It is also worth noting that the Government does not commit to a timescale for bringing the proposed changes into force.

The context of the Government's proposals indicates that the Government is thinking in terms of ongoing schemes rather than schemes in wind-up.  Section 37 of the Pensions Act 1995 only applies to schemes that are not winding up.  The response also refers to the importance of considering the strength of the employer covenant, a point that is far more likely to matter in the context of ongoing schemes.  Until we see draft legislation, it is unclear to what extent the proposed changes will impact scheme surplus repayments where a scheme is winding up.

To the Point 


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