The government will reduce the tax charge on defined benefit surplus that is paid directly to members, after MPs intervened about taxation of lump sums.

The Budget document states that “the government is building on reforms to unlock some of the £160bn of defined benefit pension scheme surplus by reducing the tax charge on surplus funds paid directly to members".

It adds: "The government will enable well-funded DB pension schemes to pay surplus funds directly to scheme members over the normal minimum pension age, where scheme rules and trustees permit it, from April 2027."

Sophia Singleton, head of DC at consultancy XPS Group, welcomed the update, saying the change opens the door to true sharing of surplus without adding to scheme pension liabilities.

"This is good news for the many trustees and employers currently exploring run-on for surplus strategies,” she added.

Ian Mills, partner at Barnett Waddingham, agreed that allowing schemes to pay lump sums rather than benefit increases could encourage more schemes to run on.

However, he said the government could have done more: "Running-on is typically most appealing when most liabilities are still active, so the absence of a mechanism to share surplus with younger members is a missed opportunity. With the government estimating up to £160bn of surpluses in scope, getting these reforms right will really matter."

Similar criticism came from Matthew Arends, head of UK Retirement Policy at Aon, who said: "It is unclear why the announced measures are ring-fenced to older members. There is the danger that the unintended consequence will actually be to unnecessarily restrict surplus payments to members if trustees want to treat all scheme members equally regardless of age.”

The chair of the Work and Pensions Committee had previously written to pensions minister Torsten Bell asking if the tax charge on lump sum pension payments will be waived for DB surplus payments to members. His response dated 17 November and published on Wednesday did not confirm this, saying pension schemes are for providing a retirement income but that it will be kept under review.

Elsewhere, an arbiter between employers and trustees, which Abrahams had also called for, is seemingly not something the pensions minister believes should be introduced.

Decisions about surplus release will remain with trustees, he argued; employers will not have direct access to surplus funds. Pointing to guidance issued by the Pensions Regulator, he said TPR will publish more by the end of 2027.

Bell reassured Abrahams that the Department for Work and Pensions is putting evaluation plans in place and monitoring TPR and HMRC data, adding that the department is also considering qualitative research with employers, schemes and members.

He noted that where employers have the power to distribute surplus left over after windup, “the courts have held that this is a fiduciary power”, meaning employers must consider similar things as trustees would.

The DWP will consult on scheme governance before the end of the year, he added, saying he welcomes the committee’s focus on DB governance.