Surplus release may be tightly controlled

Surplus release may be tightly controlled - pension surplus — Surplus release may be tightly controlled

The government’s proposals to allow overfunded defined benefit pension schemes to release surplus assets could be limited by reporting and notification requirements, industry commentators have said. The Department for Work and Pensions published draft regulations for the release of surplus from pension schemes, a move that has been widely welcomed by many service providers.

However, some have said the guardrails included in the proposals may limit the scope and frequency of payments, with trustees required to notify scheme members and the Pensions Regulator, as well as obtain an actuarial assessment. Under the plans, pension schemes will need to be fully funded on a low dependency basis before trustee boards can consider releasing surplus capital.

Laura McLaren, head of DB scheme actuary at Hymans Robertson, emphasised that surplus sharing “must be operationally workable” with governance burdens kept to a minimum. The proposals, including member notifications, actuarial sign-offs and testing, will likely mean any surplus release process takes around six months, she said.

That’s a long cycle – and it makes the current framework feel less suited to more regular or frequent surplus distributions. McLaren added that getting the detail right is essential to give schemes, trustees and employers the confidence to engage – while safeguarding better outcomes for members.

John Wilson, head of pensions technical at Aptia, pointed out that the proposals added complexity through additional reporting, tax, and member communications, as well as placing “significant reliance on actuarial certification over a multi-year horizon”.

Matt Brown, surplus management lead at Isio, said a three-month consultation period was “appropriate for a one-off refund but would be clunky for regular surplus refunds paid as part of an ongoing surplus management policy”. Saye Mkangama, pensions partner at PwC, said: “If the framework for releasing surplus becomes too complex or uncertain, trustees and employers may default to simpler, more established routes such as insurance buyout, particularly given current attractive pricing in that market.”

Ian Mills, head of DB endgame strategy at Barnett Waddingham, said that, despite the new flexibilities, the majority of schemes would likely only release surplus once they reach buyout-level funding. Mills said that, importantly for trustees, the challenge will be balancing the opportunities created by surplus release against their ongoing responsibilities to members and the strength of the sponsoring employer covenant.

With around four in five schemes now in surplus, there is a significant chance to deploy capital more effectively across the economy while still delivering good outcomes for members. The consultation closes on 2 September, and final rules are expected to come into force next year.

Schemes must be fully funded on a low dependency basis.