UK government responds to DB consultation: what pension scheme trustees and employers need to know

The UK government has released its response to the previous administration's "Options for Defined Benefit schemes" consultation. The response proposes significant changes to the rules governing use of surplus and confirms that the government will continue to explore the potential for a new consolidator scheme administered by the Pension Protection Fund (PPF).

Release of surplus

The Pension Schemes Bill 2025 will include new provisions designed to make it easier to release surplus from ongoing schemes, where trustees choose to do so.

There will be a new statutory power for trustees to pass a resolution to amend scheme rules to allow for surplus sharing with the employer where the rules do not currently allow for this. The requirement for trustees to have passed a resolution under section 251 of the Pensions Act 2004 will be repealed.

The government said it is "minded to legislate" to change the threshold for sharing surplus – this presumably could be either under an existing rule or under one introduced using the statutory power to amend scheme rules – from buy-out to fully funded on the new low-dependency basis. It stated: "Sharing of surplus will continue to be at the discretion of …trustees and subject to actuarial certification. Further detail will be set out in draft regulations" on which the government will consult.

Existing legislation (section 37 of the Pensions Act 1995) will also be amended to clarify trustee's duties when taking a decision in relation to surplus extraction, but there is no suggestion that those duties will be watered down.

To support trustees, the government will work with The Pensions Regulator (TPR) to develop guidance on defined benefit (DB) surplus extraction. This guidance will refer to "a suite of options open to trustees to bring benefits to members from surplus sharing" and the consultation response stated that the "potential  for members to benefit from any surplus shared with the sponsoring employer must remain a key consideration for trustees."

No further pensions tax changes are planned at this time. In particular, although the government will continue to consider the tax rules for surplus extraction, there is no immediate proposal to change the law so that one-off payments to members will be authorised payments.

The government has also decided not to proceed with the option of a 100% PPF underpin, which would have allowed employers to pay a higher PPF levy for full coverage of scheme liabilities in the event the scheme were to enter the PPF. This might have encouraged employers to run schemes on, or made it easier to agree the extraction of surplus. However, there were a number of concerns with the proposal, including affordability for schemes and moral hazard.

PPF-administered consolidator scheme

The government is continuing to explore the potential role of a PPF-administered consolidator scheme to provide an endgame option for schemes that cannot secure benefits with an insurer or transact with a commercial DB superfund.

These might include underfunded as well as small but well-funded schemes. The employers of underfunded schemes would be required to agree a schedule of payments to meet the deficit as against the entry price, with the entry price likely to be at least as great as the scheme's long-term funding objective.

Because the aim of any consolidator will be to complement existing options – not compete with them – the government wants to take time to monitor and understand current market changes and innovations. As such it will not legislate for a consolidator in the Pension Schemes Bill.

The consultation response does, though, confirm that a significant amount of design work has been done, alongside the PPF, since the consultation and sets out current thinking around any consolidator scheme. This suggests that the consolidator would be ring-fenced and separate from other funds administered by the PPF. It might also operate on a "run on" basis rather than targeting buy-out and be open only to DB schemes that are closed to the future accrual of benefits. A number of questions are still being considered, including whether standardised benefit structures should apply and what should happen to any surplus.

The PPF in its statement on the Options for DB consultation response said that it would support the government as it considers the consolidator option further.

Osborne Clarke comment

The government hopes that its changes to surplus sharing "will give trustees of DB pension schemes access to their surplus to benefit both employers and members. Employers could use this funding to invest in their business, increase productivity, boost wages or utilise it for enhanced contributions in their defined contribution schemes. Schemes could also use funding to unlock increased benefits for scheme members, including through providing discretionary benefit increases." If schemes run on, it might also be easier for them to consider investment in productive assets, including UK productive assets. Any investment in UK companies or productive assets would be in line with the government's growth agenda.

As ever, the detail will be key. We currently expect a draft Pension Schemes Bill to be published before the parliamentary summer recess and we hope that the consultation on the related draft regulations will be published at the same time or shortly after the summer recess.

We also expect that the threshold for release of surplus will be something more than a scheme being 100% funded on a low-dependency basis. A margin, buffer or covenant requirement of some kind seems likely. Trustees and employers should look out for the Pension Schemes Bill and draft regulations and then continue to follow developments.

It is good news that the government is continuing to explore a PPF-administered consolidator scheme to provide an alternative DB endgame option for some schemes. We understand the need to give this proposal careful consideration before proceeding.

An endgame option for schemes which will otherwise struggle to find one should improve outcomes for members – and reduce risk to members and to the PPF. A consolidator could also be in a position to consider investment in productive assets, including UK productive assets.