In brief
With the recent publication of draft regulations, and an accompanying statement from the Pensions Regulator, the new surplus flexibilities introduced by the Pension Schemes Act 2026 (“2026 Act”) which are due to come into force in April 2027 are taking shape. We consider what this means for well-funded UK defined benefit plans which are not in wind-up.
At a glance
Due to a combination of the refund of surplus legislation, and the particular wording of their plan rules, it has been impossible for some pension plans and extremely difficult for others to refund surplus to employers.
With the dramatic improvement in funding of Defined Benefit (DB) plans over the past few years, and the Government’s preference for more pension plans to run-on, the practical difficulties of refunding surplus have come sharply into focus. The 2026 Act has stripped away the most problematic obstacles to surplus refunds, but has made this subject to procedural conditions which are set out in Regulations.
The Government’s aim with the new legislation is to introduce greater flexibility for DB plans – to allow trustees to unlock value for both employers and scheme members where that is possible but without undermining protection for members.
While the new legislation opens the door to plans currently shut out by the current regime, and lowers the threshold for returning surplus for others (from the buy-out basis to a self-sufficiency basis), trustees must still conclude that it is consistent with their fiduciary duties to refund surplus – this will involve careful consideration of the specific circumstances in which the request to refund surplus has arisen.
The draft Regulations, which introduce the new funding threshold, are subject to consultation, which runs until 2 September 2026, and the new legislation is due to come into force in April 2027.
What has changed?
The new legislation has moved from a restrictive, rule-based approach to a flexible, trustee-led discretion and has abolished a number of conditions in the existing legislation which prevent many schemes from refunding surplus even if there is a good rationale for doing so.
The other major change is to the funding threshold for refunding surplus – from the buy-out basis to the low dependency basis. The low dependency basis is a plan-specific basis which assumes that the assets are sufficient to meet future liabilities as they become due without the need for further employer contributions.
One element that hasn’t changed is that members must be notified of the proposal to refund surplus – the existing three-month notice period is retained in the draft Regulations.
The table below summarises the key changes made by the 2026 Act and the draft Regulations:
| Issue | Before | After |
| Power in plan rules to pay surplus to the employer | Power must exist in the plan rules |
Can be paid using statutory override – i.e., surplus can be returned even if rules are silent or refund of surplus prohibited by the rules |
| Section 251 resolution (i.e., a resolution which the trustees must have passed by 5 April 2016 to preserve an existing power in the scheme rules to make payments of surplus to the employer) |
Required in order for surplus to be refunded |
Condition abolished |
| Condition that refund of surplus is in members’ interest | Statutory requirement |
Removed (but fiduciary duties remain) |
| Funding threshold | Buy-out basis |
Low dependency threshold |
| Member notification | Three-month notice period |
Three-month notice period |
What conditions must be satisfied?
The draft Regulations have introduced a number of procedural conditions which must be met before surplus can be refunded to the employer. The Regulations have received a generally positive reception, although collectively the steps are quite cumbersome and so, unless there are changes to the Regulations, it may be difficult to make sequenced or regular refunds. Additionally, a few details need ironing out. The Financial Reporting Council has said that it will publish guidance to help actuaries with the practical application of the tests in the Regulations.
We detail the regulatory steps below – the key substantive conditions are the current and future funding tests (named “Condition 1” and “Condition 2”).
The Regulations anticipate that trustees will be able to make surplus payments directly to members aged over normal minimum pension age ((“NMPA”) - currently 55; increasing to age 57 from 6 April 2028) – this will require a change to tax legislation. Younger members will have to wait to NMPA to receive any surplus payments.
Steps up to and including the decision to pay a provisional amount
- Obtain an actuarial assessment – this must conclude that the value of the scheme’s assets are greater than its liabilities on a low dependency basis.
- Obtain actuarial advice on the amount and date of surplus payment.
- Consult with the employer on the amount and date of surplus payment.
- Make a decision as to a provisional amount for payment to the employer.
Steps between proposal and payment
- Notify members of the amount of surplus to be refunded and any benefit improvements and/or payments to members – members must be given at least three-months’ notice.
- Current funding test (Condition 1) – the actuary must be satisfied that the value of the scheme’s assets greater will be greater than value of liabilities on a low dependency basis on the date of the actuarial certificate after considering the amount payable to the employer, the value of any benefit augmentations and payments to members and any other material developments between the actuarial assessment and the actuarial certificate.
- Future funding test (Condition 2) - the actuary must be satisfied that at any given time during a three year period from the actuarial certificate the value of the scheme’s assets is at least as likely as not to be greater to than the value of the scheme’s liabilities on a low dependency basis after considering the amount payable to the employer, the value of any benefit augmentations and payments to members and any other material developments between the actuarial assessment and the actuarial certificate.
- Obtain employer consent to the payment of the provisional amount.
- Obtain an actuarial certificate which addresses the tests in the legislation.
- Make payment to the employer – this must be made within five working days of the actuarial certificate.
Post payment steps
- Notify Pensions Regulator of (among other things) the amount by which assets exceed liabilities on a low dependency basis, the amount of the payment and details of any benefit augmentations and authorised member surplus payments within a week of the payment.
Fiduciary duties and the Regulator’s statement
The draft Regulations are only one side of the coin – they introduce minimum standards and procedural safeguards; trustees will still need to be comfortable that refunding surplus to the employer is consistent with their fiduciary duties. This is recognised by the Pensions Regulator in its statement which accompanied the draft Regulations.
The Regulator’s statement sets out how it expects trustees to approach discussions relating to the use of surplus and the factors they should consider - these include the size of the financial buffer above low dependency, how long the scheme is anticipated to run on, the current and future strength of employer covenant and the extent to which members will benefit.
Some commentators have interpreted the Regulator’s statement that “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” as an indication that the Regulator expects surplus sharing as a default. This may be drawing too much from two lines of the Statement – more likely, it is a reference to taking account of members’ expectations, especially if members have previously received certain discretionary benefits (such as pre-1997 pension increases). Even where there has not been any previous practice, employers which are anticipating a refund of surplus need to be aware that trustees may make this conditional upon sharing the surplus with members to some extent.
Practical implications
The primary significance of the new legislation is that surplus refund will become a potential option for all DB plans. That will not however translate into widespread surplus refunds, as squaring refunds with fiduciary duties will remain a challenge – to make a refund the trustees must be comfortable that they are not putting members’ benefit entitlements at risk.
Where we expect to see surplus refunds is in plans which are comfortably in surplus on a low dependency basis (we expect trustees to want a decent buffer against adverse experience), which are supported by a strong employer covenant, and which are intending to run-on (or at least not intending to buy-out and wind-up in the near future). Interestingly, the Regulator in its statement suggests that negotiating contingent assets may be particularly useful if the scheme is funded above low dependency but not at a full buyout level.
We would expect a refund of surplus to follow negotiation between trustees and employers which considers not only the immediate surplus refund but which maps out the future direction of the fund, and whether the endgame is buy-out or run-on.