The Prime Minister and Chancellor have announced plans to reform the rules and regulations around accessing surplus in defined benefit (DB) pension schemes making it easier for employers in the UK to access surplus in well-funded DB schemes and re-invest these assets. The announcement, which was made ahead of a meeting between the Prime Minister, Chancellor and the leaders of large UK businesses, came as a part of the government’s renewed focus on economic growth in the UK.
The announcement was brief but it appears there will be legislation to create an overriding power for employers to access scheme surplus with the consent of scheme trustees. Currently, many schemes have rules which prevent surplus being paid to employers in any circumstances and which prevent the scheme being amended to allow this. Fuller details will be included in the response to the Options for Defined Benefits consultation, expected to come sometime this Spring.
As the pensions industry awaits further clarification, there are some key questions that employers should start considering. First, it is not clear whether the new powers will be available to all schemes, regardless of whether they are ongoing or winding up. Secondly, it appears that the new powers will not allow employers to override trustee involvement in decisions about scheme surplus, and so employers and trustees will have to negotiate whether, when, and how much surplus will be released from the scheme. Trustees may seek to understand the planned uses for the withdrawn surplus and/or ask for improvements to benefits (for example discretionary increases to pensions in payment).
Thirdly, it will be important for employers and scheme administrators to consider the impact of tax charges on withdrawn surplus. The tax rate now stands at 25%, down from 35% following the Mansion House reforms in 2023, but conceivably this may also be subject to review.
Finally, it will be key to know what actuarial basis will be used to determine whether a scheme is in surplus or not. If the government requires a cautious valuation approach (eg requiring that schemes must be fully funded to buy-out level, or on a low dependency basis), fewer schemes will be treated as being in surplus. If the government instead allows a looser and more scheme specific approach, then a greater number of employers might be able to take advantage of the new rules on scheme surplus, although flexibility will bring greater risk if the scheme members lose out as a result. The trustees will, of course, have their usual fiduciary duties to consider as part of any assessment of appropriate uses of surplus.
For more information on the government’s plans, and pension scheme surplus more broadly, please speak to the authors of this blog post or your usual Freshfields contact.
