Government sets out conditions for unlocking ‘trapped capital’ in defined benefit pension schemes
The government has published a consultation setting out conditions on freeing ‘trapped’ capital from defined benefit pension schemes, in a bid to keep pace with the rapidly changing pension landscape and free up greater amounts of capital.
The consultation, published on Wednesday by the Department of Work and Pensions, set out plans to give trustees greater flexibility to release surplus funds to benefit employers, scheme members and the UK economy while maintaining strong funding levels.
The plans come as DB pension schemes find themselves in their “strongest ever financial position”, with the number of schemes in surplus having quadrupled in the last five years, meaning most scheme assets now exceed the value of promised pension benefits.
This has left the government looking to free trapped capital in overfunded schemes in a bid to boost economic growth and encourage greater employer investment.
The consultation set out proposals including changing the funding threshold, replacing the current buyout-based test with a low-dependency funding test.
Government proposals
The government expressed confidence that “full funding on low dependency is the right threshold for surplus extraction”, calling low-dependency funding “a robust and prudent threshold”.
It also proposed introducing a forward-looking funding test, claiming the security of benefits in a scheme “is not only determined by the funding position at the time of the release but also whether any surplus release meaningfully impacts future scheme funding”.
The consultation argues this additional test provides trustees with further assurance that, where they choose to release surplus to the employer or to members, the release will not threaten the scheme’s funding position over time.
The consultation also suggested strengthening the process of surplus release, including requiring an actuarial assessment of assets and liabilities, trustee consideration and professional advice to be taken into account, and agreement with the sponsor on a provision.
The report also called for greater clarity for scheme members, proposing notifications to them should be given at least three months before payment, while schemes should also notify the Pension Regulatory upon the payment being made.
The consultation closes to responses on 2 September 2026.
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”.
But they urged the government to ensure long-term member security remains a key priority and does not get lost amidst any potential reforms.
David Brooks, Head of Policy at leading independent pensions consultancy Broadstone, commented: “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.”