Earlier this year, we noted the closure of the UK Government's consultation on reforms to the regulation of defined benefit pension scheme provision.
Amongst a flurry of other news, at the end of May the UK Government confirmed the measures on facilitating surplus refunds and on DB consolidation that are to be included in their forthcoming Pension Schemes Bill.
There is no definitive news on the timing of the Pension Schemes Bill itself, except to note that a previous intention to lay it before Parliament before the Summer recess has been replaced with a reference to "later this year". Also - no commitment is given for the time at which these changes are to enter force.
Facilitating Surplus Refunds
As announced earlier this year, the Government will proceed in the Pension Schemes Bill with provisions designed to remove barriers to surplus extraction from ongoing DB schemes, while still protecting member benefits. These have now been confirmed to include:-
- a statutory resolution power giving trustees discretion to modify scheme rules to permit refunds of surplus where these are not currently permitted, even where this is prohibited by the rules themselves, or where steps were not taken to preserve a surplus refund power under the Pensions Act 2004 using a "section 251 resolution";
- (following consultation) reducing the minimum funding level before a surplus refund can be made, from full buyout funding to full funding on a low-dependency funding basis; and
- clarifying that a statutory requirement of the Pensions Act 1995 that any surplus return must be in the members' interests, is intended only to reflect existing fiduciary duties, and not as a separate or more stringent test.
The extraction of surplus from an ongoing scheme will remain, as the Pensions Act 1995 currently requires, strictly at trustee discretion and where the existence of the surplus is confirmed (on the revised basis) by actuarial certification.
The Pensions Regulator will produce updated guidance in due course, referring to the "suite of options open to trustees to bring benefits to members from surplus sharing" which, the response insists, "must remain a key consideration for trustees".
While it is to be kept under review, no change is proposed to the rate of taxation for refunds of surplus, which was reduced from 35% to 25% on 6 April 2024. Later in 2024 HMRC confirmed their interpretation that this tax was expressed as a percentage of the gross amount and not (as had been suggested) the net amount.
The Government say their package "brings additional scheme surplus into scope for extraction, while maintaining a sufficiently prudent approach". Ultimately, pension scheme trustees – with funding guidance that still says "low dependency is not no dependency" ringing in their ears – will be the judges of this.
Public / Government DB Consolidator and a new DB Superfund Regulatory Regime
Although the idea had been floated, the Government have confirmed that the Pension Schemes Bill will NOT introduce a Public Consolidator for DB schemes. Not disrupting existing markets that are considered to be functioning effectively has been identified as a priority, and the Government has concluded for the present time at least that:-
- the buyout market is adapting to suit smaller schemes; while
- its proposed legislative regime for DB superfunds, to be included elsewhere in the Pensions Schemes Bill, should help provide options for well-funded schemes not funded to buy-out level.
The Government will continue to monitor how the market services schemes that are less well positioned to take advantage of commercial solutions. Previous statements from the Pension Protection Fund (PPF) itself, and the level of detail in the new response, make it clear that significant thinking has been done on how the PPF could run such a fund, so it certainly shouldn't be assumed that this idea has gone away for ever.
In related news, a voluntary PPF tier, which was consulted upon and would have provided 100% coverage (instead of the usual 80%) in exchange for additional levy payments, will NOT now be introduced.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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