Government confirms plans for surplus extraction flexibility and setting up a public consolidator

On 29 May 2025, the Government published its Options for Defined Benefit (DB) schemes response to the DWP consultation on increased flexibility for surplus release and the Pension Protection Fund (the PPF) operating a consolidator vehicle for schemes that are unattractive to commercial consolidators.

Around 75% of DB schemes currently have a low dependency surplus totalling around £160bn in surplus assets. These recent funding gains have prompted the Government to explore ways in which this surplus could be unlocked and, it hopes, used in ways that could benefit the economy, both employers and members.

The Government has now confirmed that it will provide trustees with the power to modify schemes to “make surplus extraction easier…with stringent safeguards…to benefit both employers and members”. The changes will be implemented through the forthcoming Pension Schemes Bill and regulations which will be consulted upon. It is still considering whether to set up a public consolidator and how this would be done.

100% PPF underpin ‘super levy’ will not be taken forward

The Government is not going to allow employers to pay a higher PPF levy in return for the PPF providing 100% compensation levels should the employer suffer a qualifying insolvency event. This is because the cost of doing so would be prohibitive and the measure raises moral hazard issues. Furthermore, it does not see the underpin as being required to ‘underpin surplus use’.

PPF as a public consolidator provider – to be considered further but not to be included in the Pension Schemes Bill

The previous Government intended to establish a public consolidator, managed by the PPF, for schemes that are unattractive to commercial consolidators and which encounter challenges in achieving buyout or superfund access. The consultation response acknowledges these difficulties but also notes evidence that the landscape is evolving quickly and that in the last year smaller scheme buyouts have increased significantly. These changes, the availability of superfunds for schemes not funded to buyout together with the challenges of having a complementary rather than competing consolidator mean that, although the Government will continue to look at a ‘small, focused’ PPF-operated public consolidator, it will not be legislating for one in the forthcoming Pension Schemes Bill. The response does, however, provide some detail on the potential structure of a consolidator.

Commentary

The surplus changes reflect the recent shift towards encouraging schemes to consider alternative endgame solutions, such as run-on, in addition to buyout. The Government has confirmed that it “will not mandate how extracted surplus is used”, albeit it hopes that changing the rules will encourage surplus release and that however it is used it will in some way benefit the UK economy.

While the introduction of flexibility is a positive step, it does not guarantee that trustees or employers will be willing or comfortable to release surplus and opt for run-on instead of buyout. A key consideration will be whether trustees can become comfortable with releasing surplus at lower funding levels. In addition, the times when many schemes had significant and problematic deficits may mean that traditional endgame solutions will still hold sway over run-on even with surplus extraction being a possibility.

We should have more detail on the surplus changes within the next few weeks given the Bill is expected to be published before Parliament recesses for summer, albeit the response just refers to a ‘later in 2025’ timescale. Trustees will also wish to think about producing a surplus release policy – TPR noted in its Annual Funding Statement 2025 that it considers having one good practice.