The UK government’s Pensions Schemes Bill 2025 (the Bill) is now in the Report stage and is expected to receive Royal Assent in 2026. Among the many changes proposed by the Bill are new powers for pension trustees to release trapped surplus in defined benefit pension schemes to the sponsoring employers. The government has stated its commitment to “make surplus extraction easier for trustees, where they choose to do so” in order to boost investment in the economy, while ensuring members’ benefits are appropriately safeguarded.
Currently, whether surplus can be returned to the sponsor in any circumstances will depend on whether this is permitted under the scheme's governing rules and, where a scheme is ongoing, whether a trustee resolution was passed allowing this before 6 April 2016. The scheme is also required to be funded above insurance buyout level before any surplus can be returned.
The new power
The Bill would introduce a statutory power allowing pension trustees to pass a resolution, conferring an express power under the rules of their scheme to return surplus to the employer. The statutory power would also enable trustees to relax any restrictions which may apply under the existing scheme rules on the return of surplus.
The government decided against introducing an overriding statutory power allowing trustees to agree to make a payment to the employer. This means there is a two-stage process, with:
- an initial trustee decision whether to pass a resolution to include or modify a power permitting the release of surplus to the employer, and
- a subsequent decision (which may also need the employer’s consent) to exercise the power to make a payment.
In practice there may not be any material lapse of time between these stages: the trustee may see no benefit in conferring on itself a power unless it considers it is likely to use it in the near future.
Trustee duties
The Bill proposes removing the requirement in the current legislation that the trustee of an ongoing scheme can only make a payment out of surplus if satisfied the payment is in the interests of the members of the scheme. The trustee would of course need to have in mind its fiduciary duties when deciding whether or not to adopt a power to release surplus, what (if any) restrictions should apply to it, and also when deciding to use that power. All the usual considerations would apply to that decision-making process, including ensuring that members’ interests are appropriately safeguarded. This may mean that the trustee can balance the interests of members and the employer, but the assessment of what the trustee’s fiduciary duties actually allow may be tricky - the way in which the rules of the scheme are framed, and the balance of powers between the trustee and the sponsoring employer, could be considered relevant notwithstanding the apparently free standing power to pass a resolution conferred by the Bill. It will be essential for trustees and employers to consider this carefully and take advice.
The Pensions Regulator’s (TPR’s) recent guidance on options for DB schemes published on 3 June 2025 makes it clear that trustees should “work collaboratively” with sponsoring employers on this topic, but also includes a note of caution for employers that they must not apply undue influence on trustees to permit the release of surplus. In our view, if TPR formed the view that the power was misused, this could open the way for it to use its powers to impose civil penalties or even criminal liability on persons involved in the process if there was a material detriment to the security of scheme benefits as a result.
Funding threshold and other conditions
The government previously stated in its consultation response published on 29 May 2025 that the funding threshold at which release of surplus is permitted will be reduced, from the buyout level to the low dependency funding level (as certified by the scheme actuary). Proposed amendments from the Conservatives and the Liberal Democrats to retain the funding threshold at the buyout level were voted down at the Committee stage, with the Parliamentary Under-Secretary of State for Work and Pensions, Torsten Bell, arguing that the existing Bill contains stringent safeguards for members such that reducing the (statutory) funding threshold to low dependency level is appropriate and will better meet the government’s policy aims.
The details of the new funding threshold will be set out in regulations on which the government will consult in due course, expected to be in spring 2026. We note the regulations might impose conditions other than the funding threshold (it is envisaged that they will definitely require notification to members).
Under the statutory power contained in the Bill, the trustee would be expressly permitted to impose restrictions on any surplus release power which is introduced by a trustee resolution. This means the trustee would have a unilateral ability to set a higher funding threshold for the release of surplus than required by the regulations, if it considered this appropriate. It could also set other conditions, either as an inherent part of the power granted by the resolution or at a later time when considering whether to exercise that power (for example, an agreed package of covenant support).
Conversely, the Bill would also enable trustees to relax any restrictions in an existing power to make payment to employers. It expressly states that this would include restrictions in a power which had been created by a resolution passed under the new provision. This means that this is not a one-time power, but one that can be exercised again if the trustee thinks it necessary. This would allow the trustee to reconsider its position on appropriate restrictions if, for example, the funding levels of the scheme had improved over time, or some members' benefits had been secured with an insurer. It may also allow trustees to take into account developing market practice.
The impact for employers is that they would need to negotiate with the trustee, potentially at both stages of the process, as to whether, when, and how much surplus would be released from the scheme, and on what terms. The trustee may seek to understand the employer’s planned uses for the withdrawn surplus and/or ask for improvements to benefits as a condition (for example discretionary increases to pensions in payment, particularly for members with benefits accrued pre - 6 April 1997). TPR’s guidance anticipates that trustees may decide to release surplus in one lump sum or as a series of lump sums, which may provide flexibility in managing scheme funding over time.
TPR guidance
While TPR is clear that trustees must take their own professional advice, and that it will in due course be issuing specific guidance on the use of the powers in the 2025 Bill, its recent guidance on end game options includes some helpful steers which would appear to align with the government’s aim of making release of surplus easier for trustees. TPR states that:
(i) it would have concerns about a scheme which is materially overfunded for a long period of time, with no plan to distribute excess funding to members or to the sponsor;
(ii) trustees should include their approach to surplus extraction as part of setting their long-term objective for scheme funding under the new funding code;
(iii) subject to the regulations which will follow, "in situations in which the scheme is likely to remain fully funded on a low dependency basis and there is no realistic risk of employer insolvency, it is unlikely that TPR would have reservations about the release, subject to [the Trustee] having considered any other relevant matter related to the circumstances of the scheme and the sponsoring employer”; and
(iv) trustees should establish their risk tolerance for surplus extraction: they will need to set a funding level appropriate for their scheme circumstances above which they believe surplus can be extracted, which may be at a margin above the low dependency basis funding level, if regulations permit.
The TPR guidance has some general points to be taken into account where a well-funded scheme is to be run on (whether or not a refund of surplus is to be made) which include the need to assess whether the scheme’s funding position and/or employer covenant are sufficiently strong to face potential risks, the impact on the scheme’s funding position of a range of stress tests, and the need to consider negotiating additional support from the employer to protect against any future drop in funding level, possibly as part of a framework agreement setting out the terms under which the scheme will continue to run on and any ‘break’ provisions. These types of consideration and protection reflect the approach that we have seen employers and trustees take when deciding to run on schemes, noting that both employers and trustees are likely to need a high level of assurance that the actions they are taking will not materially risk the security of scheme benefits or leave the employer with an unacceptable risk of needing to provide further funding in future.
Return of surplus on winding up
One point to note is that the new power in the Bill to pass a resolution enabling payments to the employer cannot be exercised once the scheme is in winding up. A further government amendment to the Bill, approved at Committee stage, also makes clear that the new power cannot be exercised to allow the trustee to include or amend a power relating to the return of surplus on a winding up. Torsten Bell has made clear that this is a deliberate policy decision by the government, on the basis that (per his comments at Committee stage) “the majority of schemes will have existing rules about how surplus should be distributed at the point of wind up”. However, this seems to us to misunderstand how many scheme rules operate: often rules which do not allow return of surplus where the scheme is ongoing do not allow return of surplus when the scheme is winding up either.
This appears to be a significant missed opportunity by government to assist trustees and employers who are considering their scheme’s endgame, including potential buyout with an insurer. It is surprising that the government has taken this approach given that, were schemes permitted to introduce a power to pay surplus while the scheme is in winding up, the existing protections on the use of surplus on a winding up under the Pensions Act 1995 would continue to apply to any such release. An ability to release trapped surplus would be extremely helpful for schemes where the rules currently leave them at risk of limbo: for example, where employer agreement is needed to trigger a winding up, but because there is no power to return surplus to the employer on a winding up it has no incentive to do so. Further, where the scheme rules do not currently permit the release of surplus on a winding up, it may be more difficult for trustees to negotiate with the employer in respect of scheme funding if there is no possibility of returning any surplus to the employer on a winding up. However, given the Bill will not resolve such issues, any issue of trapped surplus will need to be considered carefully well in advance and resolved prior to commencing any winding-up process.
Tax
It will also 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. The 25% rate would not be altered by the Bill as it currently stands, although the government has stated the pension tax regime, of which this is one element, remains under review.
The government has also stated that it is considering whether direct payments to members from surplus should be permitted as an authorised payment for the purposes of the Finance Act 2004.
Timing
Given that it will take some time for the Bill to move through the Parliamentary review process and the requirement for consultation on the regulations and the associated TPR guidance, the government does not anticipate that the new rules will be in effect until the end of 2027. For some employers it may be possible to use surplus to benefit employers under the current rules, while for others it may be possible to start discussions on the general approach and the safeguards which the trustee would want to see in place even if they are still some way from having the power to make an actual payment. This will require careful analysis of each scheme’s individual rules.
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.
