Unlocking pension scheme surplus: Navigating the upcoming changes

Background

Upcoming changes to the surplus sharing regime mean that employers could receive a payment from the surplus of the pension scheme that they sponsor. For many years, the rules around sharing pension scheme surpluses were very complex. However, the changes made by the Pension Schemes Act 2026 are intended to simplify the way pension scheme trustees deal with funding surpluses.

The law

Prior to April 2006, where a scheme was in surplus, the trustees were required to take actions to eliminate that surplus. At the time, the most common method was to return surplus funds to the scheme’s sponsoring employer, provided that certain conditions were met.

From 6 April 2006, pension tax simplification measures had the effect of removing the requirement to reduce a pension scheme surplus. However, if the trustees of a scheme wanted to retain the power to repay surplus to an employer, they were required to pass a resolution before 5 April 2016.

As part of the Government’s pensions reform strategy, the Department for Work and Pensions launched a consultation in 2024 to establish what areas of the current surplus regime needed to change. As a result, changes made by the Pension Schemes Act 2026 will be implemented, such as:

• providing trustees with a statutory power allowing them to modify the rules of a defined benefit pension scheme, to provide for surplus sharing where the rules do not currently provide for it;
• reducing the funding threshold that schemes are required to maintain before sharing of surplus can be considered;
• repealing the requirement for trustees to have passed a resolution to allow for the sharing of surplus.

These provisions are expected to come fully into force in April 2027.

Under the Pension Schemes Act 2026, the requirement for a pension scheme to be funded on a buyout basis before trustees can consider release of surplus will be replaced by a requirement for the pension scheme to be fully funded on a low-dependency basis. Trustees will also need to carry out a three-year forward-looking test to determine whether any release of surplus would take the scheme below that basis. Additionally, trustees will need to notify members of the scheme of any proposals to release surplus funds to the employer and to explain whether any improvements to member benefits would be awarded.

What should trustees and employers do now?

Recent analysis of the funding of defined benefit pension schemes by the Pensions Regulator showed that many schemes are now in surplus, largely due to the considerable improvement in funding positions over the past few years. As such, it published a statement in June 2026 that aims to support open discussions between trustees and employers ahead of the new rules coming into force. The statement provides some initial principles for trustees to consider when looking at releasing surplus and will be followed by more detailed guidance.

Ahead of the upcoming changes, trustees should consider opening discussions with employers on how the changes may impact on their scheme. This will allow trustees to draft a policy on surplus release, ensuring that both parties fully understand the circumstances in which any surplus may be released.

For employers, they should be aware that trustees may take the employer’s financial position into account when determining whether to release surplus funds, but the trustees’ fiduciary duty is owed to the members of the pension scheme. Any decision to release surplus will therefore need to be balanced against the trustees’ duties to act in the best interests of the members of the scheme.

How can we help

At JMW, our pensions specialists can discuss the scheme’s objectives and work alongside you to help develop a formal process and policy on the release of surplus. We can advise on any scheme-specific issues that you may need to consider as trustees or sponsoring employer of a defined benefit pension scheme.