Surplus release: Time to put plans and policies in place

The Pensions Regulator (TPR) will soon consult on guidance related to the release of surplus, while the Financial Reporting Council – which regulates auditors, accountants and actuaries – is also working with TPR and the government to ensure a cohesive regime.

The Department for Work and Pensions also confirmed that its regulations will be finalised “early in the new year” so they are ready to come into force in April alongside planned tax changes. These tax changes, which will amend how one-off pension payments to members are treated, are subject to a separate consultation that was launched last week by HM Revenue & Customs, with feedback sought by 7 September.

Industry experts welcomed the added clarity around timelines and urged trustees to ensure they have plans in place around how any surplus will be used.

‘Significant preparation required’

Arabella Slinger, partner and head of covenant at XPS Group, said: “Trustees and employers should work together to agree surplus policies underpinned by a thorough understanding of the covenant and the risks to its longevity. This will enable a suitable package of robust safeguards to be put in place, whilst enabling all stakeholders to share benefit.”

Her colleague Tom Froggett, partner and head of defined benefit (DB) run-on, added: “While the opportunity is significant, so is the amount of preparation required. Employers and trustees should not delay in agreeing a surplus policy. Any scheme with a surplus should have a surplus policy, just as any scheme with a deficit should have a recovery plan.”

Froggett highlighted that schemes that have completed or are considering a buy-in with an insurer could also access surplus earlier under the new rules, and so should review their plans.

“Allowing members to benefit directly from DB scheme surpluses is a logical next step in the government’s wider programme of surplus reform. It recognises that well-funded schemes can create value for multiple stakeholders while continuing to provide strong protection for accrued benefits.”

Leonard Bowman, Hymans Robertson

Janet Brown, partner at Sackers, said: “The framing of the new member surplus option as a trustee discretion means that having a policy on surplus as part of a run-on agreement with the sponsor will be key.

“The introduction of the one-off lump-sum payment will provide trustees with increased flexibility to share surplus with members, while not baking in additional liabilities into the long-term funding of their pension scheme.”

Brown added that HMRC’s consultation clarified elements of the tax treatment of one-off payments, including that they can only be made once a member reaches their normal minimum pension age, although payments can be deferred for younger members.