Government announces easements for employers to access surpluses in defined benefit pension schemes

The UK Government has announced that legislative changes will be made to enable all defined benefit pension schemes to change their rules to permit surplus extraction where there is trustee and employer agreement.

The Pensions Regulator analysis (as at 30 September 2023) shows that of around 5,000 defined benefit pension schemes, over 3,750 are in surplus on a very prudent basis, with the aggregate surplus estimated to be in the region of £225 billion. Prior to this announcement, most of this surplus has not been able to be accessed by employers as there have been two primary barriers:

• Defined benefit pension scheme’s Trust Deed & Rules do not permit surplus extraction until a scheme has been wound up or the last payment due has been made.
• Even if the Trust Deed & Rules do permit extraction, it can be difficult for trustees to agree to this given their primary duty is to protect pension scheme member benefits.

The announcement from the government today, whilst light on the exact detail, will address the first barrier as it will allow all defined benefit pension schemes to change their rules to permit surplus extraction where there is trustee and employer agreement. The exact details of these changes and further directives in defined benefit surplus policy will be provided by the government in the spring as part of a response to last year’s consultation held on ‘Options for Defined Benefit Schemes’.

The second barrier is also expected to be addressed in the spring response as last year’s consultation aimed to remove behavioural barriers by bringing surplus extraction in line with trustee duties. The proposals to achieve this range from holding eligibility criteria for surplus extraction to expanding the role of the Pension Protection Fund (PPF) to safeguard 100% of members’ benefits.

Stuart Price, Partner and Actuary at Quantum Advisory, said: “Defined benefit pension schemes are in a significantly different place as of today compared to ten, or even five years ago and the treatment of defined benefit pension scheme surplus is a more pertinent issue than ever. The announcement from the government is very welcomed and gives all stakeholders involved in defined benefit pension schemes more to consider when looking to agree their overall journey plan and endgame options.

“As well as looking to boost the UK economy and boost growth for employers, requiring trustee and employer agreement does allow trustees to consider a range of options, including but not limited to, a one-off enhancement to member benefits.

“Notwithstanding the above, the exact detail will need to be investigated as and when released as ultimately trustees will need to feel confident that member benefits are protected which is their primary objective.”