The Chancellor’s latest budget paves the way for DB schemes to use surplus funds to make direct payments to pensioners.
The current Pension Schemes Bill 2025 includes provisions to change the law, so trustees can modify scheme rules to allow surplus sharing with the sponsoring companies and members via a new statutory power in a revised Pension Act framework.
This Bill also proposes to reduce the funding threshold that schemes must meet before surplus can be released. Under the new regime, schemes need only be funded on a “low dependency funding basis” rather than the more onerous “buy-out” standard, which is expected to significantly expand the number of schemes eligible to share surplus.
However in previous consultants there were concerns that if surpluses were shared directly with members this could incur tax penalties.
Hymans Robertson head of corporate DB Sachin Patel says: “If it is indeed the case that the tax treatment has changed to allow direct payments of DB surpluses to pensioner members without additional tax penalty, this would be a welcome and positive step.
“It would provide trustees and employers with greater flexibility to deliver real value to members, without incurring extra tax costs or adding to future liabilities. Such a development would support more efficient decision-making and ensure members can benefit from targeted support when it’s needed most.”
Matthew Arends, partner and head of UK retirement policy at Aon adds: “The details behind the Chancellor’s Budget announcement also extend to enabling DB surplus funds to be paid directly to scheme members over normal minimum pension age from 2027. This is intended to make it easier for members to benefit from and for trustees and employers to agree to surplus extraction, boosting investment across the economy.
“This would seem to indicate the government will implement the widespread desire from the pensions industry to allow surplus release to members via lump sums in a tax-efficient way
“However, it is unclear why the announced measures are ring-fenced to older members. 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.”
Barnett Waddingham partner Ian Mills says: “Budget changes to allow well-funded defined benefit schemes to pay surplus funds to scheme members over retirement age from 2027 will likely have flown under the radar for many.
“While a seemingly small change, it’s an amendment that may now encourage more schemes to run-on. But perhaps most importantly, it gives companies another option beyond increasing pension liabilities – something that most are actively trying to avoid to minimise their DB pension risk.
“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.”
XPS head of DC Sophia Singleton adds: “One piece of good news that was perhaps under the radar was authorising direct payments to pensioners from surplus, opening the door to true sharing of surplus without adding to scheme pension liabilities. This is good news for the many trustees and employers currently exploring run-on for surplus strategies.”