Government consults on DB refunds

The Government has launched a consultation (with draft regulations) on DB surplus sharing, and The Pensions Regulator has published an associated statement.

These developments follow the passing of the Pension Schemes Act 2026. Section 9 of the Act will allow trustees to modify ongoing DB schemes by resolution, to give themselves a refund power or to remove restrictions on any existing power.

There are no major surprises either in the consultation document or in TPR's statement. As expected following the Government's May 2025 position paper, the funding test for refunds will be "low-dependency" – albeit with a forward-looking element.

Key points are summarised below. Note that they relate only to ongoing schemes. There is separate legislation for schemes in winding-up.

The consultation proposals

From 6 April 2027, there will be a new framework for all refunds from ongoing schemes (even where trustees use an existing refund power, rather than the power conferred by section 9).

Under the proposed regulations, if a refund is contemplated, the following requirements will apply:

• The trustees will need to obtain an "actuarial assessment" – a funding report (not necessarily a full valuation) on a low-dependency basis. A refund will be permissible only if and to the extent that the report shows a surplus.
• The trustees must take advice from the actuary about the proposed refund, and consult the employer. 
• The trustees must give members three months' notice of the proposed refund, telling them also about any associated benefit improvements.
• The trustees may proceed with the refund only if members have been duly notified, the employer consents, and they have obtained actuarial certification as described below.
• The actuary will need to certify (in the five working days before the refund is made) that, allowing for the refund and any associated benefit improvements/member payments, in their opinion:
  • the scheme is in surplus on a low-dependency basis as at the date of certification; and
  • the scheme is "at least as likely as not" to remain in surplus on a low-dependency basis throughout the following three years.
• The trustees must notify TPR of the refund within one week after it is made, and must supply information about funding and any benefit improvements/member payments.

A surplus journey illustration shows how these requirements fit together.

As announced in the Autumn 2025 Budget, tax legislation will be amended from 6 April 2027 to cater for "authorised member surplus payments" – lump sums for members from relevant surplus. These can be paid only to members above normal minimum pension age (currently 55, rising to 57 in April 2028), but may be granted to younger members for payment once they reach NMPA.

The section 9 power will apply only to schemes which are subject to the statutory funding regime. The power will not apply to schemes with a Crown guarantee or to superfunds.  Separate provision for superfund surplus-sharing will be made in due course. 

The consultation closes on 2 September 2026. The Government is likely to announce the outcome before the end of the year.

The Pensions Regulator's statement

TPR's statement provides "early views" on the principles which trustees will need to consider for surplus-sharing purposes. The statement also includes case studies. 

TPR suggests that:

• Trustees may want to retain a buffer above low-dependency (which may be necessary in any case, in order to obtain the forward-looking certificate from the actuary). Buffer size should be determined in an integrated way, taking account of investment strategy and the employer covenant.
• Trustees will need to understand the employer covenant, but a full assessment is not necessarily expected. 
• Trustees may want to seek contingent assets, especially if the scheme is not fully-funded on a buy-out basis.
• Both the employer and members may expect to benefit from surplus release; TPR anticipates that this will "feature in discussions". Trustees might consider:
  • the extent to which members have contributed to the scheme;
  • whether benefit provision has been reduced, capped or enhanced;
  • the impact of inflation and the extent of indexation; and
  • members' reasonable expectations, especially if discretionary benefits have regularly been granted.

TPR will consult later in 2026 on formal guidance.

Comment

As to how the new regime will play out in practice, there are two main unknowns: the forward-looking funding test, and the stance which will be adopted by trustees. 

For an actuary asked to opine on funding levels over the following three years, the primary issue is likely to be investment strategy – de-risking and hedging of market risks. 

The attitude of trustees will of course be scheme-specific and dependent on relevant circumstances. TPR has said that it does not intend to "direct how surplus should be used"; but trustees may focus on its list of possible considerations, including indexation and any past reduction in benefits.