APPT Chair, Rachel Croft, commented: “The content of the Bill on DB surplus release is relatively limited awaiting subsequent regulation. We concur with the need for a wide statutory override to enable surplus release (and sharing) as this will help navigate the variety of provisions within existing trust deeds and rules and allows all schemes to review viability of surplus release and sharing on a common footing. We welcome the Government’s recognition of the evolving funding landscape for defined benefit (DB) pension schemes and the opportunity to contribute to the development of surplus release policy. As professional trustees, our primary duty is to safeguard the interests of scheme members while ensuring the long-term sustainability of pension arrangements.”
The APPT response supports the principle of enabling surplus release where schemes are demonstrably well-funded, provided that robust safeguards are in place. This response is in addition to comments made in a letter to DWP on dated 18 April 2024 (Options for Defined Benefit Schemes consultation).
APPT supports the Government’s intention to introduce greater flexibility in the use of DB scheme surpluses, recognising the significant improvement in scheme funding levels across the UK. However, any framework must:
prioritise member security,
maintain trustee independence and
avoid unintended incentives that could compromise prudent funding or investment strategies.
Key considerations for surplus release
Funding Thresholds and Triggers: APPT recommends that surplus release should only be permitted where schemes meet a high bar of funding security, such as full buyout funding. A low-dependency approach could also be acceptable, subject to clear guidance on what this means and consistent connection to the new DB Funding Code and prudent buffers. Covenant will also be key. No trustees want to be in a position where they could have secured their members’ benefits in full but decided to share surplus only for funding, investment or covenant to deteriorate, leaving both members and trustees vulnerable.
Trustee consent: Trustees must retain the final decision-making authority on surplus extraction. Any legislative framework should require trustee agreement for surplus release and allow trustees to refuse surplus extraction where they believe it is not in members’ best interests.
Use of surplus: Surplus can be used in various ways, depending on each scheme's context. The APPT’s key message is that this is not a trivial matter to navigate and the guidance from the Pensions Regulator needs to make clear that Trustees must do their due diligence and go through a proper process. Sponsors should understand the need to engage with trustees in good time about the possibility of returning surplus.
Safeguards and governance
The APPT evidence proposes the following safeguards:
statutory funding adequacy test before surplus release,
independent actuarial certification,
disclosure to members of surplus use and rationale and
regulatory oversight by The Pensions Regulator (TPR) for large or complex cases.
Tax and incentive alignment
The APPT notes elements of the current tax treatment are significant disincentives to responsible surplus management. We urge the Government to review the tax regime to align with policy objectives and consider conditional tax relief where surplus is used to enhance member benefits. Specifically, member lump sums for surplus distribution and fund transfers to master trusts for employee savings should be included. We recommend the Government engage with HMRC early in the regulatory process.
If the government objective remains for DB surplus release to be extensively used to invest in UK PLC then that should also be reflected in tax treatment.
Comments on a selection of other Bill measures
Small pots: The proliferation of multiple small DC pots is arguably where the greatest leakage of value for members occurs. APPT is supportive of the measures to consolidate small pots. However, the threshold of £1000 set for defining a ‘small pot’ is very low and risks many pots that most would consider to be small being exempt. This is a concern, particularly as the threshold is explicitly set in the Bill. Whilst the logic for introducing consolidators after the creation of DC megafunds is sound, the trade-off is that there will still be at least another five years for small pots to continue proliferating, which is not ideal. Consolidating small pots is welcome, however there are several challenges, particularly in legacy schemes, that may negatively impact the member.
On consolidation: in summary, we back consolidation where it demonstrably benefits members, but it must be carefully managed, evidence-led, and designed to maintain a diverse, competitive pensions market.
Value for Money: In our view, every pension saver deserves the same standard of protection and oversight, regardless of the scheme’s governance model. A fragmented system creates uneven outcomes—and this is a chance to fix that. Where a scheme fails to deliver value, any transfer to an alternative arrangement must be properly governed, transparent, and focused on long-term benefits for members—not just short-term metrics or commercial gain.
Placing a duty on DC scheme trustees to offer default retirement products to members known as guided retirement: APPT is broadly supportive of this new duty. Outside of DC master trusts it is likely that the duty will be met by partnering with an external provider. It will be important to clearly articulate the boundary of the trustee duty in scenarios where a scheme partners with a pension provider rather than providing access directly.
It is also currently unclear how this new duty will interact with the FCA’s targeted support proposals given that the default retirement duty appears to go further than the targeted support proposals, which are voluntary.
Ensuring suitable default options are available for unengaged members, either from within the DC scheme or through third party partnerships, mandating clearer communication, including support such as pre (and potentially post)-retirement workshops, online resources etc, to help members understand their options are all welcome initiatives. These should aid member engagement and provider for better member outcomes.
For a copy of the APPT full evidence click HERE.
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