The Government must introduce safeguards to protect trustee independence as it gives well-funded DB pension schemes greater flexibility over surplus, according to the Independent Governance Group (IGG).
IGG responded to the Government’s consultation on Surplus Flexibilities for Defined Benefit Pension Schemes and said it supports greater flexibility over surplus but says trustees must be able to make independent, scheme-specific decisions while keeping members’ benefit security as the priority.
It supports the proposed low dependency funding test as a statutory minimum for surplus release but says it should not automatically trigger the release of surplus. Trustees should be able to retain additional funding where needed, taking into account factors including solvency, buyout position, covenant strength, investment strategy, funding buffers, contingent assets and long-term objectives.
IGG research found that 67 per cent of DB corporate decision-makers favour retaining a buffer above the legal minimum before surplus is used or distributed, while just 16 per cent believe schemes should retain only the legal minimum.
It said trustees should be protected from replacement where they do not support a sponsor’s approach to surplus and should obtain independent advice from advisers appointed by the trustees.
The group also called for greater flexibility around payment timings and phased surplus releases, alongside clearer requirements for member notification and handling representations or objections.
IGG trustee director and head of policy and external affairs Louise Davey says: “The DB landscape has changed significantly. Improved funding means many schemes are no longer focused solely on closing deficits, and surplus is creating new opportunities for trustees and sponsors to consider what their schemes could deliver for members and sponsoring businesses. This brings the potential for competing priorities, and more complex decision-making. The Government is right to recognise this change and explore greater flexibility and guidance over how surplus can be used
“But surplus should not simply be viewed as a windfall. It is the product of a funding and investment strategy that needs to remain resilient over the long term. It can disappear if conditions change. The security of members’ benefits must remain the starting point. Low dependency provides a sensible minimum threshold, but meeting it shouldn’t automatically mean surplus is available to use. Our own research suggests sponsors recognise that caution too, with two-thirds favouring a buffer above the legal minimum before surplus is used.
“Beyond that minimum, there should be no default way that surplus should be used or which party should benefit. Every scheme is different, and trustees need the freedom to weigh the circumstances of their scheme and reach the right decision. That is why their independence is so important. Regulations and guidance should support independent, scheme-specific judgement, rather than favouring a particular outcome, and we urge the Government to consider safeguards to ensure this.”