From April 2027 a new option will be available to many ongoing UK defined benefit schemes, with a clearer route to releasing surplus to sponsors, and potentially sharing it with members. In practice, it will generally be sponsors who take the initiative by proposing a surplus release. The trustees’ role is then to decide whether they have power to agree, and whether surplus release is consistent with their fiduciary duties, taking account of the rules, funding position, covenant, member interests and long-term future of the scheme.

For many years, refunds of surplus from ongoing defined benefit pension schemes have been unusual due to funding deficits, tax charges and statutory restrictions. With safeguards, the Government aims to make surplus release easier. The reforms would achieve this in two main ways: by levelling the playing field between schemes with different rules, and by lowering the funding bar from buyout to low dependency. The Pension Schemes Act 2026 will allow trustees to add a new refund power, or remove restrictions on an existing one. Draft regulations and initial Regulator guidance set out the intended process. The position on winding-up does not change.

The trigger is likely to be a sponsor proposal rather than a trustee initiative. The familiar trustee questions remain: can we do this, and if so, should we?

A power, not an obligation

The new regime should not be read as a direction to release surplus. Trustees will still need to act within their powers and for proper purposes, taking account of relevant considerations and managing conflicts. Courts will not normally substitute their own view for a properly reached trustee decision, but they may intervene if trustees fail to ask the right questions or follow a defensible process.

That makes the trustee process central. A sponsor may see surplus as capital that can be returned to the business, but trustees should start from a different place: the scheme exists to provide the promised benefits, and scheme assets remain within that trust framework until properly released.

Funding and actuarial safeguards

The proposed funding gateway is based on the statutory low dependency funding level – a deliberately lower bar than the buyout basis. Trustees will need actuarial confirmation that the scheme remains sufficiently funded after the payment, and is expected to remain so on a forward-looking three-year test.

The actuary’s certificate is essential, but it is not a substitute for trustee judgment. Trustees may want covenant advice because surplus release reduces the cushion available if experience changes. Trustees should also consider whether the liability data and benefit specification are sufficiently reliable before relying on the funding number.

Rules, history and legal due diligence

Scheme rules vary widely. Some have an employer refund power; others restrict or prohibit refunds. Some may require all residual assets to be used for members. The new legislation is intended to level the playing field by reducing the significance of historic differences in scheme drafting, but it does not remove the need to understand the existing rules and the consequences of using a new or amended power.

Legal due diligence is important. Trustees will want confidence that the benefits being valued are the correct benefits. Issues arising from historic amendments, equalisation, administration practice or section 37 of the Pension Schemes Act 1993, including rules-based closure to future accrual, may need to be resolved before an irreversible decision is made. The fact that a scheme appears well-funded is less reassuring if the liability base is uncertain.

Member interests and sponsor proposals

The draft legislation removes the express statutory requirement that trustees be satisfied that a refund to the employer is in members’ interests. Nevertheless, member interests remain central to the fiduciary analysis. Trustees should consider the security of accrued benefits, the impact of reducing the surplus cushion, and whether members should share in the upside through benefit improvements or lump sum surplus distributions.

Trustees are not obliged to negotiate for improvements in every case. It may be entirely proper to agree to a sponsor refund if the funding and covenant position is strong, the sponsor has supported the scheme, and members are not disadvantaged. Equally, trustees may conclude that uncrystallised surplus should remain as a reserve, especially where the scheme is not yet insured, the covenant is uncertain, or future risks remain material.

Because sponsors will usually initiate the discussion, trustees should ask the sponsor to explain clearly what it is proposing, why it considers release appropriate, and whether any member or scheme protections are being offered. Trustees should give proper consideration to the employer’s legitimate wishes, while keeping their own decision-making distinct, particularly where employer-nominated trustees or sponsor representatives are involved. The employer’s consent will be needed for a refund, and in multi-employer schemes this can raise practical questions.

Process and communications

The draft regulations require advance notice to members before a refund is paid. Members will not have a formal veto, but communications matter. A clear explanation may reduce the risk of challenge.

For trustees, the safest route is to build a contemporaneous record of the process: the powers considered, advice taken, conflicts managed, alternative outcomes reviewed and member interests weighed. That record will be important if the decision is challenged years later.