Government eases access to defined benefit pension surpluses

The Government has announced new measures to make it easier for companies to access surpluses in their defined benefit (DB) pension schemes, which currently total over £150 billion. This change is expected to provide businesses with greater flexibility to invest in the wider economy and enhance benefits for scheme members. This represents a significant development in the pensions industry.

There has been a growing anticipation in the pensions sector for reforms that would address the practical barriers preventing the release of pension surpluses. The Government acted to reduce the tax on such releases from 35 percent to 25 percent from 6 April 2024. Historically, many DB schemes have been restricted by specific rules that prohibit refunding surpluses to employers before a full buyout and wind-up are complete. Additionally, section 251 Pensions Act 2004 has posed challenges, as many schemes lost the power to refund surpluses if they did not make a trustee resolution by April 2016.

Most Corporate Pension DB Schemes have been closed to new members for many years and therefore, as time expires, the projected surplus should become more certain and Trustee concerns about release of surplus more manageable.

Accessing the Pension DB Scheme surplus, whether by taxable payout of surplus or, e.g. a loan from the DB scheme to the employing group, can enable Groups to use funds more efficiently, e.g. pay down debt, fund investment etc.

The Government has proposed to open a route to override restrictive scheme rules and the provisions of Pensions Act 2004. This move aims to unlock trapped surpluses, allowing employers and trustees to agree on surplus utilisation, even in schemes where current rules do not permit it. The Pensions Regulator supports this initiative, emphasising the importance of member protection and the potential to enhance member benefits or stimulate economic investment.

The Government plans to detail its surplus policy in response to the previous Options for Defined Benefits consultation in spring 2025. This will coincide with the anticipated Phase 1 pensions review. Key questions to be addressed include:

• Eligibility Criteria: Determining the appropriate funding level for surplus utilisation, with potential benchmarks such as 105 percent funded on a low-dependency basis or 100 percent buyout funded being considered;
  
• Covenant Requirements: Surplus utilisation may be contingent on the employer's financial strength, possibly measured by an investment-grade credit rating;
  
• Trustee Considerations: Trustees will need to balance surplus utilisation requests with the fiduciary duty to protect member benefits. Additional guidance, possibly in the form of a new surplus utilisation code, is expected to assist trustees in making informed decisions; and
  
• UK investment incentives: It remains unclear how the Government plans to encourage, incentivise or even mandate the use of these refunds to support UK economic growth, ideally through productive UK investment.
  

While precise timelines for implementation are challenging to predict, the Government has expressed urgency. Key steps include:

• Spring 2025: Publication of the Phase 1 pensions review and consultation response;
  
• Legislation: Primary legislation will be required to enact the statutory override, with the Pension Scheme Bill 2025 expected to be introduced in spring 2025; and
  
• Regulator Guidance: The Pensions Regulator will likely follow a structured process of consultation and finalisation before guidance takes effect.
  

This development marks a positive step towards enhancing the flexibility and utility of DB pension scheme surpluses. We encourage stakeholders to stay informed and engaged as further details emerge. Should you have any questions or require assistance, please do not hesitate to contact the authors or your usual KPMG in the UK contact.

For further information please contact:

• Stephen Collins
• John Gething