Simmons welcomes DWP’s response to surplus return consultation

On 29 May 2025, the Department of Work and Pensions (DWP) published its long-awaited response to its February 2024 consultation on Options for Defined Benefit Schemes. The response sets out the DWP’s proposals to give greater flexibility to return surplus to employers.

What’s the background?

The DWP acknowledges that:

• 3 in 4 defined benefit (DB) schemes are now in surplus on a “low dependency” basis (see below); but
• the law currently makes returning surplus to employers very difficult before the scheme finally winds up. Further, there is a “scheme rules lottery” – many scheme rules currently prohibit surplus return in any circumstances (often reflecting old pension tax regimes that applied when the scheme was first set up).

What will the new flexibilities be?

The Pension Schemes Bill 2025, due to be introduced into Parliament later this year, will give trustees a statutory power to amend their scheme’s rules (a scheme rules override) to allow them to return surplus to the employer. The only mandatory precondition would be actuarial confirmation that the scheme remains fully funded on a “low dependency basis” after the surplus is returned – i.e. at a level which makes it unlikely that the employer will have to make further contributions to the scheme. The new law will allow the surplus to be used in any way the trustees and the employer agree.

What do we think?

• We welcome both the scheme rules override, and the fact that it will not be prescriptive – leaving it to employers and trustees to agree the detail of when, and on what conditions, surplus return is permitted.
• The Government will maintain the current 25% tax charge on surplus return. Some employers will therefore find it more tax efficient to access surplus in different ways - e.g. using it to fund their ongoing defined contributions (DC) for current employees.
• We hope the Government will consider loosening the pensions tax regime to permit one-off direct payments to pension scheme members out of surplus. If allowed, this might be preferable to granting increased ongoing pensions for some schemes.
• Employers should assess if progressing a scheme rules override would be beneficial from an accounting perspective, even if surplus is not returned immediately.

For further detail, please get in touch with Edward Smith or Danny Tsang.