Draft surplus release rules need further refinement to support schemes seeking to run on, according to the Society of Pension Professionals (SPP).
The society published its response to the Department for Work and Pensions’ (DWP) consultation this week and was broadly supportive of the government’s plan to allow schemes to release surplus if they are fully funded on a low dependency basis.
However, the SPP said the current wording of the rulebook was skewed towards one-off payments and could make it difficult for schemes that want to ‘run on’ and make regular payments to members or sponsoring employers.
“The combination of a disproportionate process for regular payments and trustee reluctance for one-off payments could potentially mean fewer schemes choose to run-on and instead opt for the insurance route.”
The Society of Pension Professionals
“For schemes intending to operate on a long-term run-on basis, repeated surplus releases should not require unnecessary duplication of governance processes where circumstances have not materially changed,” the SPP said in its response. “This is likely to be viewed as a disproportionate governance barrier to using the new surplus flexibilities.”
The society argued that trustees were more likely to be comfortable with smaller, regular payments from an overfunded scheme that could be easily “switched off” if circumstances change, compared to one-off large sums.
“The combination of a disproportionate process for regular payments and trustee reluctance for one-off payments could potentially mean fewer schemes choose to run-on and instead opt for the insurance route,” the SPP stated.
Jon Forsyth, chair of the SPP’s DB committee, said the surplus release proposals “provide a sound framework for well-funded DB schemes to make productive use of surplus while protecting members”.
He added: “However, the regime needs to work effectively in practice. Greater flexibility around regular and phased payments, the actuarial tests, and payment timetables would help ensure the new framework delivers its intended benefits without creating unnecessary governance burdens or other unintended consequences.”
PASA calls for clarity on communications
Meanwhile, the Pensions Administration Standards Association (PASA) has flagged the importance of communication with members around how surplus will be used.
In particular, PASA said rules or guidance were needed to ensure members understood when payments would be made, especially if adjustments were made to benefits when members were yet to retire.
“Further clarity is needed on payment timing and member communications, particularly where payment can’t be made until many years after the original allocation and entitlement,” PASA’s response stated.
The association also highlighted the need for rules around recordkeeping to ensure schemes can show what payments have been promised when these are made years after the initial decision to award them.
It also suggested a “de minimis” approach for trivial payments to be set up, which PASA said would reduce administration costs.
