UK pension reforms ease surplus release for defined benefit schemes
Published on 17th July 2026
Should trustees aim to run on rather than buy out, what will their reformed powers allow and how will they best be used?
At a glance
The government is consulting on draft regulations setting out proposed detail on the conditions that schemes will have to meet to release surplus.
The minimum threshold for surplus release will be lowered.
The Pensions Regulator has suggested incorporating a financial buffer above this threshold, with trustees and employers having to consider appropriate levels for each scheme.
Funding challenges once dominated the defined benefit (DB) pension agenda, but, nowadays, many trustees are faced with the pleasant "problem" of a surplus and what to do with these funds. In recent years, hundreds of DB pension trustees have taken the opportunity to buy in with an insurer, buy out, wind their scheme up and, sometimes, pay surplus funds to the scheme's employer at the end of this process.
For schemes choosing not to take this route, the rules around the release of surplus are more restrictive. The Pension Schemes Act 2026 will change this, giving the trustees of DB schemes the power to amend scheme rules to allow them to share scheme surplus with employers while the scheme is still ongoing. In June, the government opened a consultation on the draft regulations accompanying the Pension Schemes Act. HMRC has now published amendments to tax legislation which will enable payments of surplus to members. All of these measures are expected to come into force in April 2027.
The Pension Schemes Act 2026
Sections 9 and 10 of the Pension Schemes Act 2026 create a framework for the extraction of surplus, but leave the detail for regulations to specify.
Where scheme rules do not contain a power to make a surplus payment to an employer, section 9 will allow trustees to pass a resolution to introduce one. It will no longer be necessary for trustees to have passed a resolution, prior to 2016, under section 251 of the Pensions Act 2004.
Where the rules already contain such a power, section 9 will allow trustees to pass a resolution to relax or remove any restrictions on it.
Section 10 concerns itself with guardrails, saying that regulations will impose conditions on when and how such payments can be made.
Conditions for release
In June, the government opened a consultation on draft regulations setting out those guardrails. These will be the Occupational Pension Schemes (Payment to Employer) Regulations 2027 and are intended to come into force in April 2027 alongside the relevant provisions of the Pensions Schemes Act.
The minimum threshold for surplus release will be lowered: instead of requiring schemes to be funded above buy-out levels, the draft regulations only require that schemes be in surplus on a low-dependency funding basis.
However, to protect members' interests, the draft regulations set out a series of conditions that must be met before surplus can be released.
Trustees must first obtain an actuarial assessment to inform their decision-making, and then actuarial certification that the scheme's assets are greater than its liabilities on a low-dependency basis on the date of the certificate and that this is at least as likely as not to remain true in the next three years.
Trustees will need to have communicated with members regarding the release of surplus at least three months in advance of the target payment date. The employer must have consented to the payment.
Any surplus payment must then be made to the employer within five working days of the actuarial certificate, and The Pensions Regulator (TPR) notified within a week of the payment being made.
Tax changes
On 13 July, the government published for consultation draft legislation, to be included in the Finance Bill 2026-27, to change the law to make payments of surplus to members from an ongoing DB scheme an authorised payment under the Finance Act 2004. At present, payment of a "one off" sum to a member would be an unauthorised payment.
The draft legislation introduces a new category of authorised payment: "authorised member surplus payments". From 6 April next year, provided that certain conditions are met, such payments will be treated as pension income and subject to the member's marginal rate of tax. Payment may only be made to a member who has reached normal minimum pension age, which is currently 55 for most members, or who meets an ill-health condition, or to a dependant after a member’s death.
The payment of surplus to employers is currently treated as an authorised payment and attracts a tax charge of 25%: this will not change, but payments will be renamed "authorised employer surplus payments".
TPR statements
On 10 June, TPR published an initial statement for trustees and employers considering a surplus payment. It has also published guidance on new models for trustees considering surplus release discussions with employers.
More guidance to come
TPR plans to consult on supporting guidance later this year, which will provide more detail on the requirements set out in the draft regulations once the Department of Work and Pensions has responded to the current consultation.
The Financial Reporting Council also intends to develop guidance for actuaries on the certifications required for surplus payments.
According to the government's updated workplace pensions roadmap, both sets of guidance should be in place between April and July 2027.
Actions for trustees
TPR has emphasised that running on and releasing surplus should be a conscious trustee decision. To focus their thinking and prepare for potential discussions with employers, the regulator's June statement recommends that trustees take steps now. It suggests that trustees consider whether their scheme has a surplus policy and, if not, whether to put one in place. It also recommends reviewing whether and how their scheme's funding and investment strategy aligns with the surplus policy and opening discussions with key advisers on required advice and support.
Osborne Clarke comment
The new flexibilities have potential to unlock surplus for both members and employers; however, trustees must remain mindful of their fiduciary duties.
TPR's initial statement suggests that trustees should consider incorporating a financial buffer above low dependency. Its size will depend on many factors, including the specific circumstances of the scheme, whether trustees envisage releasing surplus in a single payment or instalments, and the period of time over which they plan to do so.
It also includes case studies which suggest that the regulator expects a cautious approach in other respects. The more detailed TPR guidance to be consulted on later this year will be critical in understanding the circumstances in which trustees may be able to release surplus and how it might be divided between employers and scheme members.
For the time being, DB trustees may find it useful to consider their position, the steps suggested in TPR's initial statement, and the opportunities ahead.
