The government has been urged to simplify its proposed defined benefit (DB) surplus framework and preserve trustee discretion, amid warnings that overly burdensome rules could limit schemes’ ability to make use of the new flexibilities from April 2027.

Responding to the Department for Work and Pensions’ (DWP) consultation on DB surplus flexibilities, LCP, the Association of Member Nominated Trustees (AMNT), Sackers and Lumera broadly welcomed the reforms, but highlighted practical, governance and administration issues that they said would need to be resolved.

LCP argued the proposed framework could prove unnecessarily burdensome for schemes intending to release surplus regularly rather than through a one-off payment.

It suggested that schemes should instead be able to establish an overarching surplus-release framework, with the full member notification process only repeated where there had been a material change.

LCP partner and head of pensions developments, Jon Forsyth, noted that the issue could become increasingly important, with a recent LCP poll finding that more than nine in 10 respondents expected to use the new surplus-release flexibilities.

“Getting the governance right will be critical so schemes can seize the opportunities available while maintaining strong protections for members and avoiding unintended consequences," he said.

LCP also called for clarification around the draft regulations’ reference to 'a low dependency funding basis', rather than 'the low dependency funding basis' contained in a scheme’s latest Statement of Strategy.

It said the DWP and The Pensions Regulator (TPR) should explain whether this distinction was intentional and, if so, when an alternative low-dependency basis could be used.

LCP partner, Steve Hodder, added: “Allowing schemes to use their surpluses has the power to improve member outcomes and also power economic growth. We are supportive of the regulations being as practical as possible to allow schemes to operate effectively in the real world.”

Meanwhile, the AMNT warned that reaching the proposed funding threshold must not create an expectation that trustees should release surplus.

The association stressed that the new power should remain genuinely discretionary, with trustees retaining autonomy over whether surplus is released, how much is paid and how any share for members is determined.

It argued that the origin of the surplus should also be considered before deciding how it should be divided between sponsors and members.

AMNT co-chair, Maggie Rodger, said: “Surplus distribution is likely to be a topic of sometimes fierce discussion and concern over the coming years.

“We urge all to remember that meeting a funding threshold should be a permitted power and not be seen as an expectation to pay out.”

The AMNT supported replacing the current buyout funding test with the proposed low-dependency threshold and including a forward-looking funding assessment.

However, it stressed that low dependency should be regarded as a regulatory minimum rather than a point above which all surplus was automatically considered distributable.

It noted this was particularly important for open DB schemes, given their continued exposure to future accrual, demographic changes, investment risk and changes in sponsor covenant.

The association also called for trustees to retain the ability to reduce or cancel a proposed payment before it was made if funding conditions deteriorated.

Sackers similarly warned that the regulations currently focused primarily on whether surplus 'can' be released rather than whether trustees 'should' release it.

Sackers partner, Janet Brown, said this would place greater importance on TPR’s forthcoming guidance reflecting trustees’ wider responsibilities and the remaining employer covenant.

She claimed that trustees would need access to appropriate legal, covenant, investment and actuarial advice to support decisions and minimise the risk of “regret” at a later stage.

Sackers also highlighted practical concerns around the proposed authorised member surplus payments.

Under the plans, members below the normal minimum pension age could be allocated a lump sum but would generally have to wait until reaching the relevant age before receiving it.

Brown warned this could create administrative challenges for schemes required to maintain and revalue those entitlements over potentially long periods.

“Promising to pay a lump sum at a future date will inevitably place extra administrative burdens on schemes, which will need to ensure that funds are available as payments fall due," she said.

The potential administrative impact was also highlighted by Lumera.

Lumera commercial director, data and dashboards, Maurice Titley, said the reforms would increase the importance of schemes holding accurate and complete member data.

“With one of the proposed options allowing surplus to be returned directly to members, trustees will need confidence that they have a complete and accurate picture of their membership and benefit entitlements,” he stated.

Titley said schemes could face additional administration requirements whether surplus was distributed through discretionary benefit improvements or direct authorised payments.

He argued that identifying eligible members, calculating their entitlements and correctly administering payments would depend heavily on underlying data quality and supporting technology.

“As trustees consider their endgame options, they should therefore be looking closely at the quality and robustness of their data and administration processes, and ask themselves whether their technology is capable of supporting the more complex outcomes these reforms could enable,” added Titley.

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