The Pension Schemes Bill 2025 represents a watershed moment for defined benefit (DB) pension schemes, promising to unlock billions of pounds in surplus funds that have been trapped for decades by restrictive scheme rules. However, beneath the headlines lies a complex web of regulatory detail, fiduciary considerations and practical challenges that trustees and employers must carefully navigate. The reforms promise to end the “rules lottery” that has left some schemes able to access surplus while others remain constrained by historical drafting decisions. However, the path to implementation is neither straightforward nor swift. To read more about the key features of the Pension Schemes Bill, access our recent blog here.
The path to surplus release
One of the most striking aspects of these reforms is the deliberately cautious timeline, which may frustrate schemes eager to access trapped surplus. The government’s “roadmap” for pensions reform outlines that we should expect consultation on surplus regulations in the second half of 2026, with regulations and guidance to be laid throughout 2027.[1] This may represent a slow pace for many schemes actively considering their endgame strategies, particularly when market conditions and funding positions can change rapidly over such an extended period. The 18-month wait until implementation may prove too long for schemes that are currently evaluating their options and could benefit from accessing surplus sooner to enhance member benefits or support employer covenant strength.
The government’s cautious approach reflects the complexity of getting these reforms right and the need to balance multiple competing interests. The reforms must protect member security while enabling economic growth, satisfy regulatory requirements while providing practical flexibility and address the concerns of various stakeholder groups from trustees and employers to members themselves. The extended timeline also allows for proper consultation on the detailed regulations that will govern how the new powers operate in practice.
The DB surplus proposal
The Bill introduces a groundbreaking statutory power that will cut through restrictive scheme drafting and create a fundamental shift in how DB schemes can manage surplus assets. More specifically, the legislation addresses the current inequitable situation where some schemes can access surplus while others cannot, based purely on historical legal drafting in scheme rules.
The statutory override operates regardless of existing scheme restrictions, giving trustees the power to either introduce surplus return capabilities where none exist, or remove limitations on existing powers through resolution. This means that schemes which have been unable to access surplus due to restrictive trust deeds or rules can now potentially do so, subject to meeting the appropriate safeguards and conditions.
However, the statutory framework contained in the Bill is just the beginning of the story, with key operational details still to be determined. The detailed operational requirements will cover crucial elements such as whether employer consent is required for surplus release and, most importantly, the funding threshold that will trigger the ability to make surplus payments. The government has indicated this threshold will likely be based on the low dependency funding basis rather than the more stringent buyout basis, but the precise mechanics and calculation methodologies remain to be determined through the regulatory process.
Balancing fiduciary duty
The interaction between the new statutory powers and existing fiduciary duties creates a particularly complex landscape for trustees to navigate. While the statutory override allows trustees to modify scheme rules regardless of current restrictions, the underlying trust terms and trustees’ fiduciary duties remain highly relevant to the decision-making process.
This complexity is especially pronounced for schemes where surplus is currently “locked in” by the terms of the trust, creating, in practice, a conflict between the statutory power and the underlying trust obligations. In some schemes, there is no ability to return surplus to an employer under any circumstances, and the power of amendment prevents the scheme from being modified to allow surplus return. In others, surplus can only be used for member benefits, with no provision for employer participation.
The recent Pensions Regulator determination in the Littlewoods case provides a stark illustration of these complexities and demonstrates how trapped surplus can create practical problems for scheme management. In that case, the scheme’s surplus was effectively trapped by restrictive trust terms – there was no ability to return surplus to the employer under any circumstances, and the amendment powers prevented modifications to allow surplus return. The employer’s refusal to consent to using surplus for member benefit enhancements meant the scheme’s wind-up couldn’t progress, creating a deadlock that required regulatory intervention. Ultimately, The Pensions Regulator used its rarely exercised powers to allow rule modifications to return surplus, marking only the second time such powers had been used.
Even more challenging are schemes with terms that allow trustees to use all surplus for member benefits without requiring employer consent, creating a presumption that surplus should benefit members rather than employers. In such cases, trustees face the difficult task of justifying why they should return surplus to the employer.
The statutory override does not eliminate these challenges or provide trustees with licence to ignore trust obligations – it simply provides a mechanism to implement decisions to return surplus that trustees can justify as being consistent with their fiduciary duties. In other words, the power to modify scheme rules doesn’t remove the need for trustees to act in the best interests of the scheme and its beneficiaries, nor does it eliminate the requirement to consider the purposes for which the trust was established and the intentions behind the original scheme structure.
The Virgin Media solution
One of the most significant practical obstacles to surplus planning has been the Virgin Media ruling, which has created widespread uncertainty about whether historical benefit changes met statutory minimum requirements. This uncertainty has prevented many schemes from properly assessing their surplus position and has stalled numerous projects, including de-risking exercises and endgame planning.
The government’s approach to resolving this issue is refreshingly pragmatic in providing a retrospective solution to the Virgin Media problem.
According to the government’s announcement, schemes will be able to obtain retrospective actuarial confirmation that historical changes did not reduce benefits below statutory minimum levels – assuming that the required confirmation could have been obtained when amendments were originally made. This will remove the uncertainty that has plagued affected schemes and dispel the fear that has prevented many schemes from taking steps to investigate whether they have a Virgin Media issue. The Virgin Media solution should lead to greater clarity in the market and allow more schemes to participate in the surplus release opportunities that the Bill creates. Read our in-depth insight on Virgin Media here.
Economic impact and market reality
While the political messaging around surplus release emphasises economic growth and unlocking trapped capital for productive investment, the practical reality may be more modest than the headlines suggest. The government has highlighted the substantial amounts of surplus held across the DB sector, with estimates indicating in the past that schemes are holding around £160 billion due to restrictive scheme rules.
However, the DWP Impact Assessment published alongside the Bill suggests a more conservative outcome that may disappoint those expecting a transformational release of capital. The assessment indicates that only £8.4 billion of surplus will be released over a 10-year period, with half of that amount going to members through benefit enhancements and only £4.2 billion flowing to employers for potential reinvestment. This represents a fraction of the total surplus identified in the market and suggests that the practical constraints on surplus release will significantly limit the amounts that can be safely extracted. The economic impact may therefore be more limited than the headline figures suggest.
Looking forward
The Pension Schemes Bill 2025 represents a significant evolution in DB pension scheme governance, but realising this potential will require careful navigation of complex regulatory, fiduciary and practical challenges that cannot be underestimated.
The success of these reforms will ultimately depend on several factors that remain to be determined. The regulatory framework will need to strike the right balance between enabling surplus release and maintaining appropriate safeguards, while the guidance will need to provide practical assistance to trustees grappling with complex decisions.
For schemes with significant surplus, the period between now and 2027 will be crucial for developing appropriate policies, engaging with stakeholders and preparing for the new regulatory landscape. Trustees should begin considering their approach to surplus release, reviewing their scheme rules and funding positions, and engaging with employers about potential opportunities and constraints. This preparation will be essential for ensuring that schemes can take advantage of the new flexibilities when they become available. The reforms create opportunities, but they also create new responsibilities and challenges that must be carefully managed.
[1] https://assets.publishing.service.gov.uk/media/684af273efd2a4de6296ff59/workplace-pensions-roadmap.pdf
