New surplus flexibilities for DB schemes: Useful clarity, with more to come

What's changing 

The PSA26 has given a unilateral power to trustees to modify scheme rules for the purpose of facilitating the payment of surplus to its sponsor, even where the scheme's trust deed and rules don't currently allow for it. In addition to being paid to a sponsor, surplus can also be used to improve member benefits or, subject to HMRC rules, fund direct additional payments to members. 

The draft regulations provide further clarity on the rules and requirements for the power to be used, including the establishment of a form of ‘funding test’ for surplus release. Before any payment, an actuary must certify two conditions on a low dependency funding basis:  

• that assets exceed liabilities at the date of the certificate, and  

• that at any point over the following three years, assets are at least as likely as not to remain above liabilities.  

The consultation closes on 2 September 2026 and the regulations are expected to come into force on 6 April 2027, supported by accompanying guidance from TPR. Whilst this guidance is yet to be released, TPR’s statement of 10 June sets out a range of principles for consideration by trustees and sponsors.  

What it means for trustees 

The decision to release surplus stays firmly with trustees - TPR is clear that any such decision is for trustees to make, and that they shouldn't be placed under undue pressure to do so. Although the PSA26 removes the previous statutory requirement that any release of surplus be in members' interests, trustees' wider fiduciary duties - and the need to balance competing considerations - are unchanged. 

Practical steps TPR suggests undertaking now include: 

• Putting a surplus policy in place, if one doesn't already exist 

• Checking that funding and investment strategy align with that policy 

• Reviewing data quality, including guaranteed minimum pension equalisation 

• Early engagement between the employer and trustees to understand each other’s respective motivations for pursuing surplus release 

• Understanding the notification requirements to members and TPR. 
  
  

What it means for employers 

For sponsors, the flexibilities open a route to value that has historically ranked somewhere between unlikely and impossible. The government’s stated aim¹ is for surplus funds to benefit employers as well as scheme members, and while the decision remains with the trustees, the modification power itself is narrowly drawn. It can only be used to introduce or relax a power to pay surplus to the employer, not to create a rule that benefits members alone. Released surplus might fund business investment, debt reduction and balance sheet improvement, or even fund contributions to a DC pension scheme – directly benefitting even those employees who are not DB scheme members.   

Releases can also be staged over several years, as one of TPR's case studies illustrates, giving employers and trustees room to adjust course if circumstances change. 

Aside from a potential source of financial value to an employer, sponsors will need to understand the accounting and tax implications. For example: At what point might an accounting surplus be recognised, and to what extent? What accounting treatment would be applied to any release of surplus?  

The importance of employer covenant  

The proposed ‘funding test’ in the draft regulations effectively permit payment of surplus down to ‘low dependency’ funding levels, albeit perhaps with a small additional buffer to reflect the funding test. Whilst reliance on the employer covenant is, by definition, expected to be low at this level of funding, it is not eliminated, particularly where the scheme adopts a return-seeking investment strategy.    

Accordingly, as recognised by TPR in its initial guidance, the strength of the employer covenant should be a key consideration for trustees when assessing the appropriateness of any surplus release. In particular:  

• The three-year funding test is forward-looking, so a realistic view of the employer's prospects – and its ability to address any downside funding experience that does occur – sits at the centre of it 

• Where a scheme is funded above low dependency but below buyout, contingent asset support can give trustees the comfort to release surplus, ensuring members remain protected if the covenant later weakens 

• The planned length of any run-on should reflect how long the covenant can credibly support the scheme 

• TPR expects covenant strength to be monitored continually, not assessed once at the point of surplus release and filed away² 

• The covenant remains the central pillar of the new funding regime, particularly the extent to which it underwrites investment risk, and may support a return-seeking investment strategy to drive surplus   
  
  

Watch this space 

While the DWP’s consultation and TPR’s statement take us forward, we’re not quite there yet.  The regulations remain in draft, the consultation runs until September, and TPR has said it will consult on supporting guidance later this year. Schemes weighing up surplus release now should treat the current framework as a clear direction of travel rather than a settled rulebook. 

The sensible move is nevertheless to prepare. Trustees and sponsors could begin by sounding out each other’s appetite for run-on and potential surplus release and start to consider the parameters under which these might be viable. From a covenant perspective, this could include ensuring comfort over covenant strength, protections such as contingent assets or contributions, and considering how a ‘run-on and release’ strategy might align with the requirements of the new Funding Code.  

Our employer covenant, actuarial, tax and accounting teams are happy to talk through what the changes could mean for your scheme. 

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^{1 Surplus Flexibilities for Defined Benefit Pension Schemes: Unlocking Value for
Employers and Scheme Members - GOV.UK
2 New defined benefit surplus flexibilities – the Pensions Regulator}