The Department for Work and Pensions (DWP) has published a new update outlining a consultation on releasing 'trapped' capital from defined benefit (DB) pension schemes, with a deadline set for September 2, 2026. The government aims to keep pace with the rapidly evolving pensions landscape and unlock greater amounts of capital to drive economic growth.
Consultation details
The consultation, released on Wednesday, proposes granting trustees increased flexibility to release surplus funds for the benefit of employers, scheme members, and the broader UK economy, while maintaining robust funding levels. The proposals emerge as DB pension schemes find themselves in their 'strongest ever financial position', with the number of schemes in surplus having quadrupled over the past five years. This means most scheme assets now surpass the value of promised pension benefits, prompting the government to seek ways of freeing trapped capital in overfunded schemes.
Key proposals
The consultation outlines several key proposals, including adjusting the funding threshold by replacing the existing buyout-based test with a low-dependency funding test. The government expressed confidence that 'full funding on low dependency is the right threshold for surplus extraction', describing low-dependency funding as 'a robust and prudent threshold'. Another proposal suggests introducing a forward-looking funding test, asserting that the security of benefits within a scheme is not solely determined by the funding position at the time of release but also whether any surplus release meaningfully impacts future scheme funding.
The consultation contends that this additional test offers trustees greater reassurance that, should they opt to release surplus funds to the employer or members, it will not jeopardise the scheme's long-term financial stability. Furthermore, the consultation recommends strengthening the surplus release process, including mandating an actuarial assessment of assets and liabilities, trustee consideration, professional guidance, and agreement with the sponsor on a provision.
Transparency and member notification
The report additionally calls for improved transparency for scheme members, proposing that notifications should be issued at least three months prior to payment, while schemes should also inform the Pensions Regulator once payment has been made. The consultation closes to responses on September 2, 2026.
Government perspective
Pensions Minister Torsten Bell said: 'For the first time in a generation, DB pension schemes are in a genuinely strong financial position, with the vast majority of schemes now having a surplus. This is something well worth celebrating. Now is the time to give trustees the option of safely translating some of those surpluses into real benefits for members and employers.'
Industry concerns
While the industry has welcomed the government consultation following the passing of the Pension Schemes Act, claiming the government has taken 'a significant step in recognising that the defined benefit landscape has changed materially', concerns remain. Industry figures have urged the government to ensure long-term member security stays a top priority and is not overshadowed by potential reforms.
David Brooks, head of policy at independent pensions consultancy Broadstone, said: 'Long-term member security must remain the overriding consideration. Surpluses can disappear more quickly than they are created, particularly during periods of market stress. While the direction of travel is positive, it remains the case that member participation in any surplus distribution is not automatic and will depend on trustee judgement and scheme-specific negotiations. The effectiveness of the new regime will therefore hinge on how consistently trustees prioritise member outcomes when considering surplus release and whether emerging market practice develops towards more explicit and equitable approaches to sharing upside between employers and members.'
