UK chancellor promises 'new flexibilities' for DB pension schemes to release surplus funds

At a roundtable with business leaders in the City of London on 28 January, the prime minister and the chancellor told CEOs that "Britain is back and open for business" and that the government is seeking to create the best possible conditions for the private sector to thrive. They promised to work in partnership with businesses to deliver high-quality jobs across the country and the economic growth to fund vital public services.

Their plans include responding to the previous administration's consultation on Options for Defined Benefits (DB) in the spring, to outline changes to allow "trapped surplus funds" in DB schemes "to be invested into the … UK economy or given to scheme members as additional benefits."

The associated press release suggests that the government might be planning to change the law to allow all DB schemes to change their rules to permit surplus extraction where there is trustee-employer agreement.

Series of reforms

In a further speech to business leaders on 29 January, the chancellor listed a series of reforms intended to "kickstart economic growth" and drive up living standards across the UK. These include the government's proposals to reform the defined contribution (DC) landscape and the Local Government Pension Scheme (LGPS) with a view to the "creation of larger, consolidated funds which have much greater capacity to invest in high growth British companies at the scale that we need them to".

They also include the plans, announced at the roundtable the day before, "to go further, whilst always protecting the important role that pension funds play in the gilt market" by introducing "new flexibilities for well-funded DB schemes to release surplus funds where it is safe to do so generating even more investment into some of our fastest growing industries." 

The Pensions Regulator has confirmed that, where "schemes are fully funded and there are protections in place for members" it supports "efforts to help trustees and employers consider how to safely release surplus if it can improve member benefits or unlock investment in the wider economy."

Osborne Clarke comment

Spring 2025 will be an important time for UK pensions. We are expecting the government to release the final report on stage one of its pensions review, the responses to its November 2024 consultations on reform of the DC landscape and of the LGPS, and its response to the previous administration's Options for Defined Benefits consultation. It is not clear whether the latter will address surplus alone, or whether it will also respond to the other DB options put forward in that consultation, including the proposal for a public sector consolidator fund administered by the Pension Protection Fund.

In terms of timescales for change, the government has already said that it plans to include any primary legislation needed following the DC landscape and LGPS consultations in a draft Pension Schemes Bill to be released this summer.

The spring release date for the DB options consultation response suggests that the government may also be planning to include in the bill any primary legislation needed for the DB surplus change. The bill will then need to travel through Parliament. Further consultations may also be needed on accompanying regulations and or guidance.

The government's hope is that surplus sharing with appropriate safeguards for members could release money to employers to invest in their business and or give them an incentive to run on their DB scheme (giving the trustees more scope to consider investments which would support UK growth) instead of securing benefits with an insurer. While this week's announcements are welcome news, the detail of the proposals will be key. As the government acknowledges, trustees "have an overarching fiduciary duty to act in the best interests of their members". This will be relevant both to decisions on surplus extraction and to decisions on investment.