The Department for Work and Pensions (DWP) has launched its highly anticipated consultation on releasing surplus capital from overfunded defined benefit (DB) pension schemes, with rules slated to come into force next year.
Under the proposed rules, DB schemes would have to be funded to at least ‘low dependency’ level as defined by the Pensions Regulator’s (TPR) funding code. Trustees can only move forward with release plans once this has been confirmed by an actuary.
Trustees must notify the regulator within a week of a payment being made, with details of the scheme’s funding level and whether the employer, members, or both parties have benefited. TPR and the Financial Reporting Council, which regulates actuaries, will issue separate guidance in due course.
Tax rule changes announced last year at the Budget mean that one-off payments can be made to members through the release of surplus without incurring large tax bills.
The DWP’s consultation is open until 2 September.
Member protections paramount, minister says
In his foreword to the consultation, pensions minister Torsten Bell emphasised that “protecting members’ benefits must remain the top priority”.
“Where schemes are well-funded, trustees should have the flexibility to take decisions that reflect their circumstances and can support long-term growth, including investment in the wider economy,” Bell said.
“Our aim is to strike the right balance between strong protection for members and appropriate flexibility for trustees, while unlocking value for both employers and scheme members.”
Torsten Bell, pensions minister
Subject to “strict safeguards”, DB surplus could be “shared between sponsoring employers and members”, the pensions minister continued, which he said represented “a more modern and proportionate framework”.
Bell said: “Trustees will be the key decision takers and strong funding levels must be maintained. They will need to consider their long‑term plans and the best interests of members, supported by the funding framework and regulators’ guidance…
“Our aim is to strike the right balance between strong protection for members and appropriate flexibility for trustees, while unlocking value for both employers and scheme members.”
Richard Knox, TPR’s executive director for strategy, policy and analysis, said: “Many well-run, well-governed and well-funded defined benefit schemes are also considering how to safely release surplus to enhance member benefits and strengthen sponsoring employers.
“To help, we have set out the principles schemes should follow when making decisions on surplus, which we will continue to evolve as the new regulatory framework emerges.”
Primary legislation for surplus release was contained in the Pension Schemes Act, which received Royal Assent earlier this year.
Reality check for surplus release: PPI research shows limits of new policy
Funding resilience, scheme rules, fiduciary duty, and other factors could all restrict the ability or willingness of trustees to return surplus to employers or members, according to a report from the Pensions Policy Institute. Read the full story.
