Surplus release rules open door to run-on

Isio has responded to two consultations in relation to surplus release in defined benefit pension schemes: DWP’s consultation on the draft surplus flexibility regulations and HMRC’s consultation on surplus payments to members. You can read our responses below:

Surplus flexibilities for defined benefit pension schemes

 We welcome the DWP’s draft regulations which set out the broad framework to permit the release of surplus to employers from well-funded defined benefit schemes. The changes keep trustees front and centre in the decision-making process ensuring that members’ rights are protected. We expect the forthcoming guidance from The Pensions Regulator will help steer trustees through the decision-making process.

We consider that the Government’s proposed combination of actuarial certification, trustee involvement and regulatory oversight should provide a robust framework that delivers a shot in the arm to DB schemes. It also sets out a principles-based approach leaving room for the Pensions Regulator to develop guidance that helpfully navigates trustees through the process.

However, we think there are areas where the draft regulations could better accommodate how we anticipate surpluses being used in practice, including streamlining the process where multiple surplus payments may be being made.

Surplus payments to members

We welcome the creation of a new type of authorised lump sum payment to members and that these payments will be treated as pension income, subject to the member’s marginal rate of tax. Making the authorised lump sum payments practical to award and administer for members is key.

However, at the moment these conditions will only apply to schemes running on. We think it would be appropriate for schemes to be able to make authorised surplus lump sum payments to members even when winding up.

Trustees will need to consider how rights to authorised lump sum payments are to be treated upon retirement, from normal minimum pension age (NMPA) to actual retirement age, and on death, transfer and divorce. The regulations should support trustees in making these decisions while retaining sufficient flexibility to tailor solutions to their schemes.