The Pension Schemes Bill 2025: Navigating the Details of Surplus Payments

The Pension Schemes Bill 2025 was laid before Parliament on 5th June.  It marks a significant milestone in the landscape of defined benefit pension schemes with introduction of a statutory amendment power for trustees to pay surplus funds to employers. This article considers some of the complexities of the proposals, particularly given trustees’ fiduciary obligations to act in scheme members’ best interests.

The Pension Schemes Bill 2025

The Pension Schemes Bill 2025 follows on from the government’s recent response to its consultation on the future of DB Pension Schemes.  Government response: Options for Defined Benefit schemes - GOV.UK.  In its response, the Government indicates plans to introduce a statutory power for trustees to modify their scheme rules to provide for surplus sharing, where existing scheme rules do not allow for this.

The Proposed Statutory Overriding Amendment Power

The statutory overriding amendment power will grant trustees the authority to amend scheme rules to confer a power on trustees to make payments out of the scheme, to scheme employers.  Introduction of this power is driven by the Government’s intention to create a flexible and responsive pensions landscape, where well-funded schemes can theoretically contribute to broader economic initiatives without compromising the security of member benefits.

However, implementation of such a power raises several critical questions about how trustees will navigate this new power. 

Benefits for Schemes with Limited Powers

The proposed statutory power offers flexibility for schemes that currently have limited powers to allocate surplus funds. Many DB schemes were set up with restrictive scheme rules around payments to employers and amendment powers which prohibited making any amendments to make such payments.  Currently a scheme in this scenario would need to rely on the Pensions Regulator’s powers or the trust law concept of a resulting trust to be able to pay surplus funds to an Employer.

Trustees' Fiduciary Duties

Trustees of pension schemes are subject to a fiduciary duty to act in the best interests of the scheme members.  Relying on the statutory amendment power to introduce a power to pay surplus funds to an employer is a relatively easy decision for a trustee board to make.  The more complex decision is whether, when and how to exercise that power.

For many trustees, consideration of members’ interests and whether and how to augment benefits for members is likely to be a prime consideration before they agree to pay any surplus funds to an employer.  This will give rise to interesting discussions regarding how surplus funds should be shared between members and the scheme employer.  Further, there are considerations for trustees on how to allocate any benefit improvements between different categories of member.

While the government has been consulting on the future of DB pension schemes, focus has also been on the nature of benefits provided by those schemes.  The requirement to increase pensions in payment was introduced with effect from 6th April 1997.  Prior to that date, there was no obligation for a scheme to provide increases to pensions in payment unless it was written into a scheme’s rules.  For many scheme members, the absence of any index-linking to their historic pension rights remains a concern.

During the late 1990s and early 2000s there were a number of cases involving pension scheme surpluses and it is likely that trustees will be looking back to some of these historic cases in reaching any decision to pay surplus funds to an employer and in awarding benefit improvements.

Exercising the Power: Funding Threshold

One of the primary challenges is the determination of the appropriate funding level threshold that would enable trustees to pay scheme assets to an employer.  Trustees must strike a delicate balance between allowing payments to employers and ensuring the ongoing viability of the pension scheme.

The Government’s consultation response indicated its intention to amend the threshold at which trustees are entitled to share surplus with the sponsoring employer.  Currently, legislation requires a scheme to be fully funded on a buyout basis.  The government is proposing to relax this to a threshold more closely linked to full funding on the low dependency funding basis. Further detail on the statutory threshold and an actuarial certification process will be set out in regulations.

However, this will be a minimum threshold and Trustees will need to consider whether they are satisfied that exercising the power to pay funds to a scheme employer is an appropriate decision to take at that point in time.  Many trustee boards may still only be willing to consider payment of surplus funds to the scheme sponsor at a point when they are comfortable that the scheme is fully funded on a buy-out basis.  This may of course depend on the trustees’ and sponsors’ plans on whether to run a scheme on time or whether to secure benefits through a buy-in contract with an insurer.

Where trustees are minded to pay surplus funds to an Employer where a scheme’s funding position is closer to the low dependency threshold, they will need to consider complexities around investment risk and the strength of the sponsoring employer as well as any downside risks.  These factors will play a crucial role for trustees who are considering whether to pay any part of a scheme surplus to an employer.

Conclusion

The proposed statutory overriding amendment power represents a significant change in the governance of DB pension schemes. While the power to amend scheme rules enabling the payment of surplus funds to employers introduces new opportunities, it also demands careful consideration before it is exercised by trustees. Fundamental to the introduction of this power is how trustees will navigate their fiduciary duty to act in the best interests of scheme members both in terms of surplus sharing and in determining whether the low dependency threshold is the right threshold when reaching a specific decision.