DB Surplus Rules Get a Makeover

After a long wait, the government has finally published its much-anticipated response to the Options for Defined Benefit (DB) Schemes consultation.

The headline? Plans to modernise how scheme surpluses can be used, reduce regulatory barriers, and offer trustees and employers greater flexibility. The response signals a welcome shift toward credible alternatives to buyouts — not only encouraging run-on approaches but also keeping the door open for consolidator models.

Top 5 Takeaways

1. Statutory Override for Trustees

Trustees will gain new powers to amend scheme rules and unlock surplus funds. This power is optional and designed to ensure trustees remain fully responsible for protecting member benefits.

2. Lower Surplus Extraction Threshold

The government plans to reduce the surplus sharing threshold from buyout funding to full funding on a low-dependency basis. Given that around 75% of DB schemes are already at this level, this change could unlock significant trapped surplus.

3. Clarity on Trustee Duties

Legal amendments under Section 37 will clarify that trustees must act in line with their existing fiduciary duties when deciding on surplus extraction, removing previous uncertainty.

4. Tax Rate Remains at 25%

The 25% tax on surplus extraction will stay unchanged, although the government is continuing to review the wider tax regime.

5. Consolidator Delayed

A government-backed consolidator, aimed at underfunded and smaller schemes, remains under review. However, it will not be included in the forthcoming Pensions Bill, so it’s still something to watch but not expect imminently.

What Happens Next?

There’s a lot to unpack here, and these proposals will undoubtedly influence the DB market’s evolution over the coming years. The government has set the direction, but many important details will be fleshed out in the forthcoming Pensions Bill — which is eagerly awaited.

"Governance, flexibility, and risk management will be vital to navigating this new landscape."

Aqib Merchant
Associate Director, EMEA Clients Team
Russell Investments

For schemes considering running on, investment strategy will be critical. Trustees will need to carefully balance releasing surplus with investing prudently to absorb market shocks and maintain the low-dependency position. They’ll also need to explore cashflow-generating assets but won’t want to put all their eggs in UK corporate bonds.

Ultimately, governance, flexibility, and risk management will be vital to navigating this new landscape. These themes featured prominently in a recent Professional Pensions roundtable on surplus extraction and run-on that we spoke at, highlighting the sector’s readiness to embrace change — once the rules are clearer.

The Bottom Line

Surplus flexibility is here, the consolidator remains a work in progress, and the Bill? Well, it’s still fashionably late — but hopefully not for much longer.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.