The Department for Work and Pensions (DWP) has published a consultation with draft regulations and an illustrative project plan under the Pension Schemes Act 2026 to facilitate the repayment of surplus from ongoing defined benefit pension schemes, even where this is not currently permitted under scheme rules.
As we noted when the Pension Schemes Act 2026 became legislation, consultations, a decision on the funding level above which surplus could be released, and implementing regulations, were all needed before this part of the legislative programme could become real.
The consultation will run to 2 September 2026, and as previously anticipated the new regime is expected to become available for surplus repayments from April 2027.
Background – a step change in the legal framework
Under the current regime, surplus payments to employers have been tightly constrained since April 2006. In particular, trustees have generally only been permitted to make a refund of surplus from an ongoing scheme if:
- there is an express power in the scheme rules;
- their ability to use it had been expressly reserved by a trustee resolution before 6 April 2016; and
- there is funding in excess of buy-out level.
In practice, this has meant that even when overall funding levels have been high in recent times, surplus release from ongoing schemes has become something of a rarity.
The inclusion of surplus release as a topic for debate in the Pension Schemes Bill last year could be seen immediately to signal a clear change of approach. However, it would have been difficult even then to predict not only a consultation and regulations, but also an official outline project plan (officially described as a Surplus Journey Illustration) with suggested timescales for each step.
Key Features of the draft regulations
Funding threshold
Surplus may only be released under the proposed regime where the scheme is fully funded on at least a “low dependency” basis. This represents a move away from the current buy-out test, and is likely to widen the range of schemes able to consider surplus refunds.
In practice, trustees will need to consider whether a higher funding level, or an additional buffer, is appropriate given their own particular scheme’s risk profile.
Forward-looking actuarial certification
A key safeguard is the requirement for actuarial certification that:
- the scheme is fully funded on a low dependency basis at the point of payment; and
- it is at least as likely as not to remain at or above that level over the following three years.
Process and timing
The proposed framework remains (like the existing one) relatively prescriptive. In particular, trustees will be required to:
- obtain an actuarial assessment of the scheme’s funding position;
- agree a provisional surplus amount with the employer;
- obtain formal actuarial certification shortly before payment; and
- make the payment within a prescribed period following certification.
Importantly, there will be no need to have passed a resolution before 6 April 2016 to have preserved any existing power to refund surplus, and any barrier to a refund under scheme rules will no longer apply.
Member notification and engagement
Members must be given at least three months’ notice of any proposed payment to the employer, including details of the amount and timing.
The draft legislation also allows for surplus to be used for the benefit of members – for example, through discretionary benefit enhancements – although the practical operation of this will need to be worked through. Sharing the benefits of any surplus repayment with the members has played an important part in officially sanctioned or trustee-negotiated surplus releases since at least the early 1990s.
However, as noted in our previous Insight article, an amendment is also expected in the next Finance Bill to permit any surplus shared with the relevant members to be paid out directly to them as lump sums once normal minimum pension age has been reached.
Regulatory notification
Trustees will also be required to notify The Pensions Regulator (TPR) after any surplus payment, providing relevant information on the transaction.
The Pensions Regulator's statement
Alongside the launch of the consultation, TPR has issued a statement aimed at supporting discussions between trustees and employers. The underlying message is certainly consistent with existing regulatory expectations and in summary TPR reiterates its views that:
- Trustee duties remain central and in particular they must be satisfied, in the proper exercise of their fiduciary duties, that any surplus release is appropriate.
- The decision to release surplus remains a trustee decision alone, notwithstanding the newly permissive regime.
- Engagement with employers is expected – particularly in agreeing the amount and timing of any payment.
- Preparation will be important – trustees should be considering strategy, governance and funding resilience in advance.
TPR also highlights a number of practical factors, including covenant strength, funding resilience and member outcomes. Importantly, it has indicated that trustees should not be subjected to undue pressure in this area and that decisions should be grounded in a robust assessment of long-term sustainability.
The point should also not be missed that as part of this clearly very joined-up approach, TPR has included a number of case studies, showing practical examples of responsible stewardship, but also, of course, examples of just exactly how a successful surplus release could be negotiated.
FRC – focus on actuarial judgement
The Financial Reporting Council (FRC) has also confirmed in a press release that, starting with an online roundtable event on 28 July 2026, it will develop technical actuarial guidance to support the new regime.
This will focus on the actuarial certification required under the draft regulations, particularly the forward-looking test. The FRC intends to publish guidance alongside the introduction of the new legislation in April 2027, following consultation with stakeholders.
Of note is the emphasis on “proportionality and sound judgement”. Actuarial certification is not intended to be a relatively mechanical exercise, but to bake-in a significant element of professional judgement in assessing funding resilience over time.
Surplus refunds in context – just one option amongst several
Exciting as these developments must be to many, it is important to remember that for many schemes with a potentially refundable surplus, there will be other, preferable options. Trustees will always need to consider any proposal for a surplus refund as just one option in the context of their broader strategy.
In practice, even once the necessary threshold is met for a possible release of surplus, many schemes will continue to focus on funding improvement and risk reduction. Some competing uses for surplus that might otherwise have made its way back to the employers, include:
- retaining a prudential buffer;
- supporting DC benefits or contributions;
- enhancing member benefits; or
- progressing towards buy-in or buy-out.
Practical steps towards a refund of surplus
For some schemes and their employers, however, surplus refunds are certainly now a very real possibility – much more realistic than was even remotely foreseeable little more than a year ago.
Employers and trustees in this position would be well advised to start planning now. Some practical first steps that can be undertaken in preparation include:
- reviewing scheme rules and existing powers relating to surplus;
- considering how surplus fits within the scheme’s long-term strategy;
- assessing funding resilience under a low dependency basis; and
- developing (or revisiting) a policy approach to surplus, aligned with trustee duties and member outcomes.
As the framework develops, the outcome of the consultation, and further guidance from TPR and the FRC should provide additional clarity.
In the meantime, for those who already feel the urge to look at surplus refund as an option, early engagement and clear thinking on strategy must be key.
If you have any queries about the issues raised in this blog, please contact Juliet Bayne, Alistair Hill or your usual Brodies contact.
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