Unlocking pension surplus: What employers need to know about the new Defined Benefit scheme reforms

At a glance

• The UK government has confirmed that it will be introducing greater flexibility for defined benefit (DB) pension schemes to share surplus funds with scheme employers and beneficiaries.
• This will be welcome news for employers that may wish to use surplus assets to invest in the business, reduce debt or improve other employee benefits.
• Safeguards will be in place to protect members’ benefits when surplus is distributed to employers.
• Employers will wish to understand the current powers in their scheme rules and engage with trustees in relation to the government’s proposals.

The current position

There are currently regulatory barriers in place that prevent employers of many DB schemes from accessing surplus funds. This means that surplus assets are presently ‘trapped’ within DB schemes that are over-funded. In particular, a surplus payment may only be made from an ongoing DB scheme to employers where: (1) this is expressly permitted by the scheme rules; and (2) a trustee resolution was passed by 5 April 2016 to preserve this power.

In addition, even where surplus funds can be returned to employers, this is currently subject to a 25% tax charge (reduced from 35% from 6 April 2024).

What is proposed?

In the government’s response to consultation ‘Options for Defined Benefit schemes’ dated 29 May 2025, it was confirmed that greater flexibility will be introduced for surplus funds to be shared with employers and beneficiaries in the forthcoming Pension Schemes Bill. The proposed measures include:

• A statutory resolution power for trustees to modify their scheme’s rules to enable surplus sharing where the scheme rules do not currently allow it.
• Reduced threshold at which trustees can share surplus with scheme employers, where the scheme actuary has certified that there is low dependency on the employer.
• Regulatory guidance to assist trustees with their decision-making process, together with clarification of trustees’ duties to act in the best interests of scheme beneficiaries.

The Government will continue to consider the tax regime for surplus extraction but has not announced any further changes at this stage.

How might surplus flexibility benefit employers?

• Access to capital: employers may be able to reclaim surplus funds, improving liquidity and freeing up capital for investment, debt reduction, or business growth.
• Collaboration with trustees: with more flexibility and regulatory guidance, employers and trustees can better manage the long-term costs and risks of DB schemes collaboratively.
• Employee benefits: employers may be able to use surplus funds to improve contributions to current DC schemes or other employee benefits.

What should employers do now?

• Ask legal advisers to review scheme rules: confirm the current powers that are available to scheme employers and trustees whilst the scheme is ongoing and/or winding-up.
• Engage with Trustees: start discussions about the potential for surplus sharing and the scheme’s long-term strategy, including dependency on the employer.
• Monitor legislative changes: we can keep employers informed about the implementation timeline and any tax or regulatory updates.

For more information, please feel free to get in touch with Gary Davies or your usual DLA Piper contact.