Pensions Regulator issues new guidelines

In a significant move for pension schemes, the Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) unveiled crucial publications that could reshape the landscape for defined benefit (DB) pensions. The DWP published its consultation titled Surplus Flexibilities for Defined Benefit Pension Schemes: Unlocking Value for Employers and Scheme Members, while TPR issued a statement on new defined benefit surplus flexibilities. Notably, draft regulations are set to roll out in 2027, with a surprising update that enforcement is now anticipated in April, rather than later in the year as previously thought.

Janet Brown, a partner at Sackers, remarked on the DWP's consultation and TPR’s statement, stating, “With most of the existing legislative requirements governing the payment of surplus on an ongoing basis set to be repealed, the consultation and accompanying draft regulations outline the conditions which will need to be met in future.” She went on to explain that one of the significant changes is a plan to lower the threshold allowing trustees to share surplus with sponsoring employers from the current buy-out level to a low dependency funding basis.

Brown elaborated on the requirements stating that “the actuarial certification must confirm that this is the case not only at the time of any surplus release, but also that it is expected to remain the case over for the following three years.” This continued oversight is crucial, as funding must remain “at least as likely as not” to stay at required levels during that period. Those schemes eager to unlock surplus more flexibly can choose to assess their funding level through triennial valuations or at alternate times.

Furthermore, many conditions for future surplus payments will be familiar within the industry; notably, the pivotal role an actuary plays and the critical need to inform both members and TPR of any surplus payments. However, the requirements for notifying TPR are becoming more rigorous. In particular, far more detail will be necessary regarding the assessment of surplus, as well as improvements to member benefits, with information required within one week of any payment to employers.

Brown highlighted the accelerated timeframe for the DWP regulations, noting, “The date on which the DWP regulations look set to come into force has also been brought forward, to 6 April 2027 rather than later that year.” This advancement will be welcomed by many within the industry, especially since schemes are already evaluating their surplus options.

Interestingly, the consultation includes an additional benefit for the industry, as it mentions upcoming tax legislation changes that will allow for authorised lump sum payments to members who meet the Normal Minimum Pension Age, provided the surplus release threshold is achieved. This aspect has received strong industry support as it permits the use of surplus without creating long-term liabilities.

Moreover, TPR provided a new statement aimed at trustees regarding surplus discussions, featuring case studies to illustrate current and future regimes. Brown quoted the TPR statement, emphasizing, “Running on with the prospect of releasing surplus should be a conscious decision.” This encapsulates the essence of TPR's guidance, which advocates for thorough preparation and a structured decision-making process in anticipation of surplus discussions.