The Society of Pension Professionals has published a paper examining the issues that need to be considered before releasing defined benefit surplus, stressing that surplus release is not suitable for every scheme.   

The paper, ‘DB surplus release: risks, rewards and responsibilities’, explores what constitutes a surplus, when releasing surplus may and may not be appropriate, the benefits and risks for members and employers, investment and governance issues, and the wider consequences for the DB pensions landscape. 

“While the factors that drive decisions on surplus release will vary from scheme to scheme, the core themes are simply those that trustees, employers and advisers have considered over the last decade to reduce risks for members. This should provide confidence that in the right situations the associated risks can be managed, monitored, and mitigated to improve outcomes for all stakeholders,” said Alex Beecraft, a member of the SPP’s Covenant Committee, who also chairs the working group on surplus release.   

The paper argues that the new flexibilities will require trustees and employers to review the right long-term path for their scheme and its beneficiaries.   

“While many schemes may choose not to release surplus, by reaffirming their strategy they can pursue existing plans in greater confidence and with a lower risk of subsequent challenge,” the SPP said.  

It points out that the Department for Work and Pensions is expecting DB schemes to release just £11bn, a much lower figure than earlier suggestions of £160bn.  

With trustees having to agree to surplus release, it is likely that scheme members will be expected – and will expect – to receive a share of any surplus that is released. The paper explores how different member groups can be affected under different scenarios – for example, delaying surplus release means more members will have died before benefitting, while releasing surplus quickly could mean current pensioners benefit at the expense of non-retired members.   

Targeting surplus release at different groups – for example to provide discretionary pre-1997 uplifts, or for defined contribution members – will mean trustees have to consider how to treat members fairly, if not necessarily the same, the paper suggests; conversely, only releasing surplus to DB members from a scheme that needed deficit repair contributions which may have suppressed other employee benefits, DC members could object. 

One issue that has been raised by various stakeholders is that there could be tax implications from giving members extra income, for example if this exceeds the annual allowance.   

One-off lump sums are not currently permitted but seen as a potentially popular way to distribute surplus. The chair of the Work and Pensions Committee, Debbie Abrahams, recently wrote to pensions minister Torsten Bell asking him to explain what discussions he has had with HMRC “regarding any changes to pension tax legislation needed to enable one-off payments to scheme members”.    

She also wants him to outline if the government will create an independent arbiter where trustees and employer do not agree on surplus distribution, and if not, if there are any plans “to monitor how surplus is distributed and act if trustee recommendations are not implemented”.