Government surplus plans revealed

Government surplus plans revealed

On May 29, 2025, the Government published the outcome of its February 2024 consultation on options for DB schemes. In a previous blog, we examined some of the key regulatory obstacles to unlocking DB scheme surplus, and explored some ways this could be made easier. But what does the Government think? We take a closer look below. 

Unlocking the scheme

In our previous blog we called out a “rules lottery”: the governing documents of some schemes simply do not allow repayment of surplus. Recognising this problem, the Government has proposed giving trustees a statutory power to modify scheme rules to enable surplus extraction where that would not otherwise be possible. In a complementary move, it will repeal an existing condition for returning surplus, namely that the trustees must have passed a resolution before 2016 approving the future use of the relevant surplus rules. With these reforms, the “rules lottery” will become a thing of the past.

Our blog also pointed out that the existing prerequisite for schemes to be fully funded on a buy-out basis – and to remain so after the return of surplus – is perhaps too strict; and we suggested that a low dependency basis would be more appropriate. The Government has now stated it is “minded” to make such a change, with actuarial certification a continued part of the process. If the Government follows through with this, there will be more surplus to go around.

Freeing up trustees

On the trustee front, the Government is tackling the notoriously strict “interest of members” test that we had highlighted: it intends to replace it with a restatement of trust law that trustees must act in accordance with their overarching duties towards scheme beneficiaries when deciding whether to return surplus. This reform will go some way to reassure trustees that they can do so lawfully in a wider set of circumstances.

It is also leaving it to trustees as to when and how surplus will be shared. This will give trustees leverage with employers, and we may see the negotiation of grand bargains, with the sharing out of surplus between employers and members. Keeping trustees at the heart of the process seems to strike the right balance between employer interests and those of members.

What does this all mean?

So, what does this all mean for DB schemes? And will the consultation outcome fulfil Government aims? It will clearly go some way towards freeing up billions of surplus funds, with schemes that may have previously been barred from repaying surplus by legislative or funding requirements now able to do so. The Government has also sought to get trustees more comfortable to return surplus. As a result, it seems likely that a growing number of schemes will look to explore surplus extraction opportunities. Even if schemes are not looking to surplus extraction in the short term, in light of the Pensions Regulator’s recent 2025 Annual Funding Statement suggesting that it would be “good practice” for trustees to have a surplus policy in place in anticipation of receiving a surplus request from the employer, now would be a good time as any for schemes to start their surplus planning journey.