UK Pensions Briefing | Pension Schemes Bill – highlights for DB arrangements

Improving access to surplus

The Bill proposes a statutory override to free up funding surplus for distribution,

• Giving trustees a unilateral power to change their scheme’s governing documents to:
  • allow the trustees to make payments of surplus funds to sponsoring employers while the scheme remains ongoing, on terms specified by the trustees; or
  • remove or relax existing restrictions on the exercise of a power to pay surplus in their scheme’s rules or earlier trustee resolutions.
• Setting pre-conditions for making any such sponsor payment. 
• Maintaining the effect of any resolutions made by trustees before the original statutory deadline of April 5, 2016, to preserve pre-April 2006 surplus payment powers, but otherwise removing any power to preserve or revive historic powers. 

The Roadmap suggests this new regime will come into force by the end of 2027. 

The Bill itself is light on detail, most of which will be in regulations. The DWP has indicated that draft regulations will only be released for consultation once the Bill itself is passed (early 2026). However just before laying the Bill the Government also released a statement on May 21, 2025, and a response to the 2024 consultation on access to surplus on May 29, 2025, both of which fill in some of the detail.

The consultation response confirms that the Government intends to drop the threshold for permitting surplus payments to 100 per cent funding on a low-dependency basis, rather than fully funded on a buy-out basis as currently. The Roadmap and statement recognise the Pensions Regulator’s estimate of a collective surplus of £160bn across defined benefit schemes in surplus on a low dependency basis, which the Government would like to see injected back into the UK economy. However there will be further consultation on the associated regulations before this can be set in stone. 

The consultation response records significant agreement by commentators for a statutory override to remove barriers and restrictions in scheme rules to help employers access surplus funds. The Government agrees, with the Roadmap confirming the target: “[schemes] and sponsoring employers need the opportunity to make a wider set of pro-growth choices for them and their employees.”

Under the Bill as presented, trustees would have full control over whether to pay any surplus to the employers, which will give them scope to negotiate with their sponsoring employers over how members should also benefit if surplus is to be extracted. However the decision to pay surplus away from the scheme is being made much easier. At present trustees can only pay surplus from an ongoing scheme if they "are satisfied that it is in the interests of the members that the power is exercised". The Bill would remove that high bar, leaving trustees to consider their “overarching duties to scheme beneficiaries". 

The Pension Regulator’s Impact Assessment blog on the Bill flags TPR’s expectation that trustees and employers should consider its new guidance on the options available for running schemes on and endgame planning. The Pensions Regulator expects Trustees to have surplus extraction plans in place, and to be prepared to take advice and conduct appropriate due diligence. 

As you can see from the above, all the official commentary on the Bill expects trustees to be onboard with making payments to employers to revitalise the UK economy. However the Bill itself does not actually include any mandation for trustees. Compare this to the surplus reduction regime applying before April 2006 where overfunded schemes had to make proposals to HMRC to reduce surplus. Given the Government's focus on getting money back into the economy, could this be another area where mandation could come if trustees do not engage positively with the new power? 

The Bill provisions are targeted at actual payment of surplus to employers and do not alter the existing landscape of other uses for surplus. Where scheme rules allow use of surplus for example to offset sponsors’ pension contributions (DB or DC under the same trust), insure risk (hedging), improve member support or enhance member benefits and options, those rules will not be affected. 

Delivering alternative endgames for DB schemes via consolidation into superfunds

For smaller and less well funded schemes, endgame options have been limited. The changes that the Bill introduces are expected to open superfund transfers to a wider number of schemes. This should strengthen this market as an alternative option to the insurance solution and promote consolidation of smaller schemes. It might particularly help where the employer covenant is complicated (for example, where the sponsor is a charity or not for profit organisation). 

The Bill introduces a permanent regulatory regime for superfunds and superfund bulk transfers. While the new regime replaces the Regulator’s interim authorisation regime the Bill’s new provisions broadly reflect the existing authorisation and clearance framework. There is growth in this endgame solution with Clara making this clear on announcing its fourth landmark transaction with the Church Mission Society and that between just four transactions it now has over £1.5bn in assets under management.

Important changes are being made to the onboarding requirements for approval of superfund transfers – the so called “Gateway Tests”.  In addition to satisfying “after transfer” requirements in relation to capital adequacy and technical provisions funding for a transfer to be approved, trustees will still need to conclude that an insurance solution is not viable at the time of the application and that the transfer will increase the likelihood that transferred liabilities will be met in full. A key change here is the removal of the current requirement that conventional buy-out with an insurance company would not be affordable in the foreseeable future.

The substantive detail of governance standards, capital buffer and authorisation and supervision (by the Regulator) is left for regulations. The DWP is committed to working with TPR to deliver the details of the permanent market for DB superfunds by 2028. The expectation is that as TPR clears more transfers the approvals process should become more efficient. 

Reducing costs as PPF levy is made more flexible

The Roadmap notes that, as part of its agenda for growth, the Government recognises that the PPF holds £13bn (in 2024) of "untapped capital". However the PPF Board cannot easily reduce its levy on schemes without also losing most of its current scope to increase the levy in the future.

The Bill solves this dilemma. It gives the PPF the ability to cap annual levy increases and discretion to refrain from imposing a levy. The new provisions would require the PPF Board to consult before reintroducing a levy (when one was not collected the previous year).

Any changes that the PPF Board wish to make to the levy will come into force in the financial year beginning after the Bill receives Royal Asset i.e. 2027 at the earliest. However the PPF announced in January that "in our levy rules we’ve included a new provision that enables our Board to calculate a zero levy if appropriate legislative changes that would give us this greater flexibility in setting the levy are brought forward, and sufficiently progressed, in the course of 2025/26", so the hope must be for a zero levy for 2026.

Any reduction in costs must be welcome. With a zero levy, that should also mean a break from the need to certify contingent assets and deficit reduction contributions, and less pressure to improve insolvency risk bandings.

Making recovering overpayments easier

Tucked away in the Bill is also a solution to a problem which has dogged attempts to recover overpayments to members and beneficiaries. Past overpayments can only be set off against future instalments of pension if the debt has been agreed. If there is a dispute as to the amount owed, the debt must have become enforceable under an order of a “competent court”.

A Court of Appeal decision in November 2023 confirmed that the Pensions Ombudsman did not constitute a “competent court”, a decision which meant a county court judgment is required for enforcement of pension debts, even when payment was ordered by the Pensions Ombudsman.

The Bill provides for the Pensions Ombudsman to be considered a “competent court”. This should help significantly in keeping costs low in overpayment cases.

Next steps

There is still a long way to go with the Pension Schemes Bill before it becomes law, and we can expect to see significant lobbying and potentially policy shifts over the next six months. However what is certain is that pension schemes, and their assets, have belatedly transitioned become a valuable tool for policy makers, so the direction of travel is clear.