Annual Funding Statement: Trustees should prepare for surplus release options

In its latest Annual Funding Statement, published yesterday (29 April), the regulator said it expected the government to set out options for defined benefit (DB) pension schemes to free up surplus funds “to support economic growth and improve saver outcomes”. 

David Walmsley, director of trusteeship, administration and DB supervision at TPR, said: “Trustees should also be considering how they would respond to potential requests from employers to release some of their scheme’s surplus. 

“They should adhere to current legislation and scheme rules regarding funding surpluses. We await details on the government’s plans to legislate in the upcoming Pension Schemes Bill.”

The government is expected to include surplus release legislation in the Pension Schemes Bill, due to be brought before parliament this spring. In January, prime minister Sir Keir Starmer and chancellor Rachel Reeves told business leaders that DB scheme surpluses could help support the government’s economic growth agenda.

TPR said it would publish additional endgame guidance in the coming weeks.

Mark Tinsley, principal at Barnett Waddingham, said: “Encouraging trustees to proactively engage with these matters is a good suggestion, ensuring that all potential opportunities are carefully considered before locking a scheme into a risk transfer arrangement.”

“The conclusions reached at the first valuation under the new regime may also inadvertently become benchmarks for discussions on surplus release.”

Emma Moore, Aon

Emma Moore, associate partner at Aon, said: “As the industry awaits a response from the government to its DB Options consultation, the suggestion for trustees to consider how they would respond to a request from the sponsor to release surplus is sensible. 

“The conclusions reached at the first valuation under the new regime may also inadvertently become benchmarks for discussions on surplus release.”

Laura McLaren, head of DB scheme actuary services at Hymans Robertson, said it was “encouraging” that TPR had committed to publishing more DB endgame guidance. 

“The steer from TPR for trustees to plan ahead, robustly considering their endgame and policies for any release of surplus in the context of their individual scheme, including how they would approach any employer request, is particularly helpful,” she said.  

“With regulatory reform looking set to meaningfully increase the potential flexibility around surplus, starting to explore scheme-specific circumstances and objectives will be time well spent. This endgame planning will be most effective where trustees and sponsors work together.”

Covenant ‘critical’ to surplus release plans 

Katie Lightstone, pensions employer covenant partner at PwC, said clarity around covenant assessment was a “critical” element of surplus decisions. 

She explained: “TPR has asked trustees to develop a ‘policy for the release of scheme surplus’, which signals a material shift in the balance of power around use of surplus in the upcoming Pension Schemes Bill. 

“Covenant strength – particularly assessment of covenant longevity – and downside protections for covenant and funding will be critical to these contingency plans, especially when trustees will need to justify any decision against their existing scheme rules.” 

David Hamilton, chief actuary at Broadstone, highlighted that the Annual Funding Statement also contained “a word of warning for those considering run-on – reinforcing the ongoing risks and governance requirements that will make this unrealistic for most smaller schemes”. 

“In terms of surplus extraction, we await with interest how the government will balance their desires for productive finance investment and protection of members’ interests in the upcoming Pension Schemes Bill,” Hamilton added.