In a speech on Wednesday, Chancellor Rachel Reeves confirmed her plans to introduce new flexibilities for well-funded DB surplus extraction in order to generate investment into some of the UK’s fastest growing industries. Reeves stated that the consultation on the pension reforms she announced during her Mansion House speech is now complete, and a full report re this will be published in spring, likely overhauling the current rules governing DB surpluses and giving trustees the power to take money out of schemes.

Commenting on what the industry expects to see in the upcoming report, partner Sonya Fraser stated: “We will need to understand exactly what powers are to be introduced when the final report is published. If there is a statutory override introducing a power to pay surplus to employers in an ongoing scenario, such as scheme run-on, thought will be needed as to how it interacts with current statutory requirements that trustees must be satisfied a return of surplus is in their members’ best interests, which is a high bar. And how will “surplus” even be determined in this scenario? Until all member benefits have been paid out or externally secured, “over-funding” is really just money in reserve given circumstances can change.”

Highlighting the importance of the fiduciary duty of pension scheme trustees, Sonya continued that “Introducing new powers for use of surplus does not automatically lead to surplus being refunded to employers to invest in Government initiatives, or indeed something else. If there is a statutory override to enable refunds of surplus, a key first step is that trustees of pension schemes will need to decide that it is an appropriate exercise of their power, taking into account the fact that their ultimate fiduciary duty to members is to ensure that the benefits that have been promised are in fact paid. Trustees will not want to find themselves in a position where surplus has been paid out and then funding levels – and security of member benefits – deteriorate.”

Sonya concluded that “If there is a statutory override to make surplus payments to employers, it would also be helpful to see the introduction of a power to enable one-off payments to be made to scheme members, such as a form of surplus sharing between employers and members where appropriate to do so. Current pensions tax restrictions do not permit this.”

Read Sonya’s comments in Pensions Expert, here.