Overfunded defined benefit (DB) pension schemes will be able to share surpluses with members through one-off payments without incurring large tax bills, the government has announced.
In the Budget document, published today, the Treasury said it would reduce the tax charge levied on payments directly to pensioner members from DB scheme surpluses.
“This will make it easier for members to benefit and for trustees and employers to agree surplus extraction, boosting investment across the economy,” the document stated.
It also means that schemes can share surpluses without permanently increasing pension payments, which can have an impact on liabilities.
This is a first step ahead of the Pension Schemes Bill’s expected changes to surplus extraction rules.
“Creating a culture of routine ‘Christmas surplus bonuses’ removes one remaining hindrance from company sponsors sharing surpluses, and is likely more highly valued by many members.”
Steve Watson, LCP
Sachin Patel, head of corporate DB at Hymans Robertson, said the move was a “welcome and positive step” by giving trustees and employers greater flexibility on surplus release.
“Such a development would support more efficient decision-making and ensure members can benefit from targeted support when it’s needed most,” Patel said.
Consultancy group LCP said the move would likely make it easier for large schemes to share DB surpluses with members.
Steve Hodder, partner at LCP, said: “This is great news, and confirms the government’s continued commitment to helping well-funded DB schemes better support their members, sponsors and the wider UK.
“Creating a culture of routine ‘Christmas surplus bonuses’ removes one remaining hindrance from company sponsors sharing surpluses, and is likely more highly valued by many members.”
However, Matthew Arends, partner and head of UK retirement policy at Aon, said that while the move was positive, it was “unclear” why it was currently limited to payments to pensioners only.
“There is the danger that the unintended consequence will actually be to unnecessarily restrict surplus payments to members if trustees want to treat all scheme members equally regardless of age,” he said.
Ian Mills, partner at Barnett Waddingham, added: “Running-on is typically most appealing when most liabilities are still active, so the absence of a mechanism to share surplus with younger members is a missed opportunity. With the government estimating up to £160bn of surpluses in scope, getting these reforms right will really matter.”
