New defined benefit surplus flexibilities
This statement aims to support discussions between trustees and employers on surplus release options. It provides early views on:
- the principles that trustees should consider when releasing surplus
- some high-level illustrative examples of how trustees should go about surplus release now, if permitted under their scheme’s trust deed and rules, and how it could change when new legislation is introduced
Published: 10 June 2026
Background
The defined benefit (DB) landscape has significantly changed over the last five years. While in the past the majority of DB pension schemes were in deficit, it is now estimated that around 60% of schemes are in surplus on a buyout basis and around 80% of them are in surplus on a low dependency basis.
The Pension Schemes Act 2026 has received Royal Assent. It provides for new flexibilities regarding the release of surplus from DB pension schemes to sponsoring employers and members. Existing legislation only permits DB schemes to release surplus to the employer if their trust deed and rules contain provisions to that effect, and only when the scheme is funded above buyout levels. In practice, few trust deeds and rules provide these provisions.
The new Pension Schemes Act broadens access to surplus release to a wider range of schemes. It introduces a statutory override enabling trustees to distribute surplus even where the scheme’s trust deed and rules do not expressly permit this. The government is consulting on regulations that will set out further details on this policy. Subject to consultation and final regulations, surplus may be released only where specified funding conditions are satisfied. The expected conditions are likely to be on the scheme’s low dependency funding basis. The regulations are expected to come into effect in April 2027.
Due to these legislative changes, trustees and employers may be starting to consider how they could go about using the new flexibilities to release surplus. Trustees’ independence on the decision to release surplus is unaffected by these new flexibilities. Trustees must be satisfied, in the proper exercise of their fiduciary duties, that a surplus release is appropriate. They must also engage with the employer in relation to any proposed surplus release, including negotiating the amount of any surplus to be distributed, having regard to the regulations which expect them to consult with the employer on the amount and timing of any payment, and obtaining the employer’s consent to make the payment to them.
Given the regulations for this policy are being consulted on, this statement does not go into the detail of their requirements. Once the Department for Work and Pensions responds to the consultation on new regulations, we will consult on supporting guidance later this year. This will elaborate further on the principles laid out in this statement and the requirements set out in the regulations.
Legal background
The Pensions Act 1995 will be amended to enable trustees to change their scheme rules by resolution to pay surplus to an employer, or to update existing scheme rules on this. New regulations currently being consulted on will specify the conditions for any surplus release. We expect these to include (non-exhaustive list):
- certification by an actuary
- employer consent for the release
- notification to members that surplus is being released
The 2026 Act introduces changes that will amend the Pensions Act 1995 and repeal the requirement that trustees are satisfied that their decision to release surplus is in the interests of the members. Trustees must continue to act in accordance with the scheme’s trust deed and rules, and their overarching fiduciary duties which will involve balancing a range of relevant considerations.
The regulations being consulted on set out a new funding test with two conditions that an actuary must certify. The first condition is that the scheme’s assets should be greater than the scheme’s liabilities, when assessed on a low dependency funding basis. The second condition is that, at any given time in the three years following the actuarial certificate, the scheme’s assets are at least as likely to be greater than its liabilities as they are to be less than or equal to its liabilities when assessed on a low dependency funding basis.
Preparing for surplus release discussions
Our new models guidance sets out how we expect trustees to approach these conversations in good faith and to work collaboratively with the employer. Trustees should take appropriate advice and consider any existing surplus policy and conflicts of interest as a first step.
We have also been clear that we do not expect trustees to be placed under undue pressure, such as seeking to replace members of the trustee board solely to secure agreement to a release. Over this whole process, it will be for trustees to decide whether to use the new flexibilities to release surplus.
We recognise that employers and trustees may want to think now about the options available to release surplus. To prepare for discussions, we recommend that trustees:
- Check whether they have a surplus policy and, if they don’t, consider putting one in place.
- Ensure that the scheme’s funding and investment strategy, including their long-term objective, aligns with their surplus policy and if not consider how it should be amended.
- Identify key advisers and start initial conversations on how they will support the trustees in determining whether to release surplus and what appropriate advice is needed.
- Consider whether the trustee board has sufficient expertise to manage a scheme in run-on, if that is the intention.
- Have up-to-date information regarding the level of funding on a low dependency basis and the current investment strategy.
- Review the quality of their scheme data and administration, including whether amendments have been applied regarding guaranteed minimum pension (GMP) equalisation and/or remediation for past alterations. Where any material issues or concerns are identified, consider whether to prioritise further work on this area.
- Start engaging with the employer as soon as possible to understand their motivations and reasons why they want surplus to be released.
- Negotiate the level of surplus release and consider the balance between members and the employer in sharing the surplus.
- Ensure they are aware of the notification requirements to The Pensions Regulator and members.
Trustees should document discussions and considerations around surplus release to demonstrate the decision-making process and rationale, in case of any future challenge by the sponsoring employer or scheme members.
Some initial factors to consider
Running on with the prospect of releasing surplus should be a conscious decision. Trustees should consider whether releasing surplus is appropriate depending on the specific circumstances of the scheme. These will include considering their fiduciary duties and a range of factors including those listed below (this list is not exhaustive).
Scheme rules and discretionary powers
Trustees must follow the scheme’s governing documents and interpret them correctly.
Funding level of the scheme
Once the regulations are in force, schemes will need to meet the required funding threshold for surplus release. This is expected to be that the scheme’s assets are greater than the scheme’s liabilities when assessed on a low dependency funding basis. It will be up to the trustees to decide the right level at which to release surplus and over what period. In doing so they should consider the size of the financial buffer above low dependency. This buffer would protect the scheme from downside scenarios and potentially be used to facilitate the generation of future surplus. We expect this to be done in an integrated way so that it comprises the investment strategy and employer covenant (as set out in further detail below).
We expect trustees to consider whether running on the scheme and releasing surplus in the long term is a viable and cost-effective option given the characteristics of their scheme.
Planned length for running on
Trustees should consider the planned length for running on. This should be based on the maturity of the scheme, the potential and feasibility of running on and the longevity of the employer covenant. Trustees of a scheme planning to run on for a short period and then buyout may have a different tolerance to risk than one that decides to run on for a longer period, potentially for decades.
Current strength of the sponsoring employer covenant and future prospects
We do not expect trustees to perform a full covenant assessment as part of every surplus release discussion. However, they should fully understand covenant support and be monitoring the strength of the covenant and the employer’s future prospects on a continual basis in line with our employer covenant guidance. This will help when considering whether the level of surplus release proposed by the employer is appropriate and whether any additional protections, such as a contingent asset support, may be required to provide improved security to the scheme to protect members benefits.
Negotiating contingent assets
Negotiating contingent assets as part of surplus release discussions may be particularly useful if the scheme is funded above low dependency but not at a full buyout level. Trustees may want to ensure there are contingent assets for the scheme to access in a downside scenario, for example arising as a consequence of the level of risk within the investment strategy or insolvency of the employer.
Whether members may also benefit
The government has been clear that the policy intent of the new changes is not to mandate the use of surplus for any particular purpose. Consequently, we do not intend to direct trustees to use surplus in a specific way. However, we anticipate both the employer and the members may expect to benefit from the release and that this will feature in discussions. In doing so trustees might consider the following:
- the extent to which members have contributed to the scheme, including any contribution relating to deficit recovery, for example in shared cost schemes
- whether benefit provision has been reduced, capped or enhanced in the past
- the impact of inflation on members’ standards of living and the extent of indexation provided through the scheme rules
- whether members have a reasonable expectation to share in surplus, especially if discretionary benefits have been regularly granted: this could also be via a one-off direct payment, which the Chancellor has announced will be allowed for by changes to separate tax legislation
Investment strategy
Releasing surplus on an ongoing basis may have an impact on the investment strategy of the scheme as trustees may need to change the composition of growth and matching assets, and the overall level of asset-liability matching to reduce the variability of future funding outcomes. This is so that the scheme continues to be well funded and can withstand downside scenarios when faced with market volatility while also being able to potentially generate surplus in the future. This will also help to address the risk of potential adverse market events following the release.
Decisions on the investment strategy, including on the level and type of risk appetite that are appropriate to run, are likely to be closely related to the level of any buffer retained and subject to consultation with the employer.
Employer’s support of the scheme
Trustees may want to consider how the employer has engaged and supported the scheme historically, as well as any current support available and the ongoing strategy for the scheme.
In most situations these factors will be interlinked. For example, a scheme may be very well funded over buyout level but with an employer whose prospects are challenging, limiting the trustees’ ability to release surplus below buyout or take more risk in the investment strategy. Alternatively, the scheme may be funded below buyout but above low dependency and the employer may have strong prospects with the ability to provide contingent asset support, meaning the trustees can be more open to different run on, investment and surplus release strategies.
Case studies
The case studies below illustrate how surplus release would work in practice under current legislation and how it may look under the future legislation. Any reference to specific values or to how surplus is released and used are purely illustrative. They do not reflect any expectations that The Pensions Regulator has, for example, about the scale of the scheme or funding levels that might be considered appropriate for run on or surplus releases.
Case study A: Surplus release under current legislation
The scheme has assets over £1 billion and it is funded 110% on a buyout basis. The employer covenant is able to support the level of risk currently being run in the scheme and future prospects are good. The scheme has rules on surplus release that were passed before April 2016.
The employer has approached trustees to release some surplus as it wants to invest in the renovation of its offices over multiple sites. Ideally, the employer would like to release all the surplus above buyout funding level. The business has been doing relatively well so the employer thinks this is a good use of some of that money.
In this scenario, the trustees should ask themselves questions like:
- What do the current rules say about surplus? Specifically, do they identify who is entitled to the surplus and how it may be applied, for example whether it may be used to enhance benefits or distributed to the employer, the members or both?
- Is there a surplus policy and what does it say about the use of surplus?
- Can they negotiate any benefit for members?
- How strong is the employer covenant and would it be appropriate to negotiate a buffer above buyout or any additional support for the scheme in the form of a contingent asset?
- How would the release of surplus affect the funding and investment strategies of the scheme?
- Is running on and releasing surplus a viable strategy for the scheme in the medium and long term?
- Does the surplus release use potentially enhance the covenant or provide benefit to employees?
The trustees review the surplus policy, which was put in place in 2016, and the scheme rules. These set out that both the employer and the members are entitled to the surplus. As part of the negotiations, the trustees require that some of the surplus must be used to provide a benefit increase to members as they consider this would be consistent with the current surplus policy and make them comfortable that the release is in the best interest of members. The trustees have sought advice from their actuary and investment consultant regarding the impact on the funding and investment strategies.
The investment adviser’s view is that the trustees’ current investment strategy provides a close match against buyout pricing and could continue to do so following any surplus distribution. The scheme actuary confirms that maintaining the existing investment strategy would therefore have no impact on the funding basis.
The trustees’ covenant adviser noted that the:
- business prospects are strong
- planned investment would be covenant enhancing
- trustees could seek contingent asset support over the renovated office sites to protect against a future downside scenario
After discussions with the employer, the trustees agree to release all the surplus above the full buyout level. It is agreed that 20% of the release will be used to provide increases to member benefits and the remaining 80% will go to the employer. While the trustees considered whether it was appropriate to negotiate contingent asset support via security over one or more of the offices, they concluded that this was not necessary given:
- the scheme will still be fully funded on a buyout basis after the surplus is released
- there is a strong employer covenant with good business prospects and low risk of insolvency over the medium term
- the investment strategy broadly matches buyout pricing
However, the trustees agreed a legally binding undertaking with the employer that contingent asset security over the offices will be provided if the funding level of the scheme drops below buyout funding levels. This is to protect the scheme’s buyout position should the employer covenant deteriorate in the future, for example due to insolvency.
The trustees also use this opportunity to consider the prospects for the scheme to continue to run on and generate surplus in the future given the size and the maturity of the scheme. They conclude that running on can be a cost-effective strategy given the size of the scheme and decide to continue to run-on with the purpose of generating surplus.
They will seek further advice from their investment consultant about whether changes should be made to their investment strategy based on this objective. They also agree to consider whether in the future they will need to set out a buffer above full buyout level or obtain appropriate contingent asset support to be comfortable to release surplus on an ongoing basis.
Case study B: Surplus release once new legislation is in force
This case is similar to case A, although the scheme does not have rules which permit surplus release. Once the changes to the legislation are in place, the employer would like to release all of the surplus above low dependency to invest in the renovation of its offices over multiple sites. The business has been doing relatively well so the employer thinks this is a good opportunity to use some of that money given the new flexibilities in place.
In this scenario, the trustees should ask themselves the following questions:
- What legal advice do they need to ensure they can use the new statutory override to pay surplus?
- Can they negotiate any benefit for members?
- Would it be appropriate to negotiate that the release of surplus is taken in instalments?
- Should there be a buffer above low dependency from which surplus is released, and at what level should that buffer be?
- What is the assessment of employer covenant and would it be appropriate to negotiate any additional support for the scheme such as a contingent asset?
- Is running on and releasing surplus a viable strategy for the scheme in the medium and long term?
- Does the release of surplus impact on the funding and investment strategies that the trustees have previously considered?
Given that the scheme does not have rules which permit surplus release, the trustees are aware they will only be able to release surplus using the new legal override provided by the changes in the Act. They are aware of the significant implications of using the new override, so they have a meeting to discuss whether they should make the amendments to the rules and the steps to take to achieve this. They conclude that using the override to change the scheme rules regarding surplus release may be beneficial for both the employer and the members, given the potential for using some of the surplus to enhance some or all members’ benefits now and in the future.
The trustees take legal advice, which confirms that the statutory override can be used for this purpose. Their legal advisers also suggest that, if the trustees decide to continue to run on releasing surplus, they should put in place and adopt a formal surplus release policy governing how and when surplus may be used so that it could be used for this opportunity and in the future.
The trustees start negotiating with the employer and one of their first requests is that some of the surplus is used to provide a benefit to members. The trustees also use this opportunity to consider the prospects for the scheme to continue to run on and generate surplus in the future given the size and the maturity of the scheme.
After taking advice from their investment advisers and actuary, the trustees conclude that running on can be a cost-effective strategy. The trustees also seek advice from their investment adviser and actuary regarding how the investment strategy can provide downside protection while providing the opportunity to generate excess returns on an ongoing basis. This results in the advisers recommending a buffer in excess of full funding on a low dependency basis, adopting full interest rate and inflation protection when measured against the low dependency funding basis and investing in an element of return seeking assets. The scheme actuary confirmed that this investment strategy would enable the trustees to maintain the existing funding basis.
The trustees’ covenant adviser noted that the:
- employer’s prospects are strong
- planned investment would be covenant enhancing
- trustees could seek contingent asset support over the renovated office sites to protect against a future downside scenario
After taking this advice and following discussions with the employer, the trustees agree to release surplus below full buyout level but there will be a 5% buffer over low dependency. This means surplus will be released above 105% on the trustees’ low dependency funding basis, which for their scheme is equivalent to around 94% funded on a buyout basis. They change the investment strategy in line with the advice.
It is agreed that 50% of the release will be used to provide a benefit increase to members and the remaining 50% will go to the employer. It is also agreed the employer will take their 50% over three years subject to the required actuarial assessment being undertaken before each payment and the actuary being able to provide the necessary certificate. This fits with the plans for investing in the renovation of offices across multiple sites and allows for a change in approach should there be a change in the scheme circumstances.
The trustees also negotiate security over one of the offices to protect the scheme’s buyout position should the employer covenant deteriorate in the future, for example due to insolvency. This is agreed by the employer.