Pension Schemes Act 2026: how will the new rules on surplus refunds work?

Now that the Pension Schemes Act 2026 has received royal assent, we have been eagerly awaiting the publication of the regulations which will put meat on the bones of the new provisions in a number of areas.  One of the first to be issued deals with refunds of surplus from defined benefit pension schemes to the sponsoring employer.

On 10 June 2026, the Department of Work and Pensions began a consultation on the draft regulations setting out the detail of the new regime for surplus refunds.  The consultation period will end on 2 September 2026 to enable final regulations to be in place, accompanied by guidance for trustees from the Pensions Regulator and some changes to the tax regime, by 6 April 2027.

The key points to note are:

• As anticipated, the relevant funding basis will be a low dependency basis (rather than a buy out basis).  The definition of this is the same as in the 2024 funding and investment strategy regulations:  broadly the scheme is fully funded on a low dependency basis if further employer contributions are not expected to be required, and the valuation basis assumes that scheme assets are invested in such a way that the value of the assets relative to the value of the scheme's liabilities is highly resilient to short-term adverse changes in market conditions.
• As well as testing if the scheme is in surplus at the date the payment is to be made, the trustees will have to be satisfied that this is likely to continue to hold true for the next 3 years.
• The draft regulations envisage that the trustees must take actuarial and investment advice which confirms the existence of the surplus before making a refund proposal to the employer, and then negotiating the terms of the payment with the employer.  In practice we think it likely that the employers will often be the ones to kick off the process with a request to the trustees.
• Once the terms have been agreed in principle the trustees must give members at least 3 months notice  about the proposals with details of the target date for and the amount of the payment to the employer and where applicable, any improvements to member benefits.  However this is not a formal consultation process.  In theory the trustees could ignore any response from the members, although in practice we would expect them to consider and respond to any representations made, as not taking account of them could lead to claims that they were not acting in accordance with their fiduciary duties.
• The trustees must obtain an actuarial certificate confirming the initial assessment and in particular that (i) on the date of the certificate the scheme is still in surplus on a low dependency funding basis after allowance for the payment to the employer and the cost of any benefit improvements or payments to members; (ii) this is most likely to continue to be the case over the next 3 years. The payment to the employer is to be made within 5 working days of the date of the certificate.
• The trustees are then required to notify the Pension Regulator of the payment within one week.

We note that the draft regulations are not prescriptive about any other conditions, for example that the trustees have to use any part of the surplus to benefit members, which is consistent with the view expressed by government during the parliamentary process that trustees will be bound by their fiduciary duties and that the legislation does not need to be prescriptive.  It is however expected that trustees will consider whether any benefit improvements for members are appropriate. 

The Pension Regulator (TPR) will be issuing guidance in this area once the regulations are final, and in the meantime has issued a statement which provides early views on the principles TPR thinks trustees should consider when releasing surplus and some high-level illustrative examples of how trustees should go about surplus release both now (where this is possible), and once the new rules are in place.  Some factors TPR considers may be relevant are: 

• the extent to which members have contributed to the scheme
• whether benefit provision has been reduced, capped or enhanced in the past
• the impact of inflation on members’ standards of living and the extent of indexation provided through the scheme rules
• whether members have a reasonable expectation to share in surplus

The consultation document and TPR statement both refer to the possibility that any share of surplus allocated to members could potentially be paid as a lump sum directly to the members (rather than an augmentation to scheme benefits).  The tax rules are being amended to allow this, making a surplus payment an authorised payment, but only if the payment to a member is made after their normal minimum pension age (ie for most people age 55).