Government consults on new rules for surplus payments in DB pension schemes

David Brooks, head of policy at Broadstone, said: “The consultation following the passing of the Pension Schemes Act is another significant step in recognising that the defined benefit landscape has changed materially over recent years. 

“Many schemes are now in a far stronger funding position than anyone would have expected a decade ago, creating legitimate questions about how surplus assets can be used more effectively.

“Providing greater flexibility around surplus extraction has the potential to create a more balanced relationship between sponsoring employers and pension schemes.

“If employers can see a clearer route to benefiting from future surpluses, it may encourage a greater willingness to support schemes over the long term and maintain investment in them where appropriate.

“However, long-term member security must remain the overriding consideration. Surpluses can disappear more quickly than they are created, particularly during periods of market stress, so it is pleasing that the proposals emphasise the importance of trustees retaining strong protections and clear safeguards before funds can be released.

“An important complementary aspect of these proposals is the emerging framework for how members themselves can share in scheme surpluses. 

“Alongside greater flexibility for payments to employers, the changes make it easier for trustees to deliver tangible benefits directly to members, including one-off payments, discretionary benefit improvements such as enhanced indexation or other targeted enhancements where appropriate.

“This creates a clearer pathway for schemes to convert strong funding positions into visible value for members, rather than surplus remaining largely trapped within funding buffers. 

“However, while the direction of travel is positive, it remains the case that member participation in any surplus distribution is not automatic and will depend on trustee judgement and scheme-specific negotiations.

“The effectiveness of the new regime will therefore hinge on how consistently trustees prioritise member outcomes when considering surplus release and whether emerging market practice develops towards more explicit and equitable approaches to sharing upside between employers and members.”