Whilst the plans for defined benefit (DB) surplus release in the Pension Schemes Bill are "not without risks" and will not be suitable for every scheme, these risks can be mitigated to improve outcomes for all, the Society of Pension Professionals has said.

The SPP's paper, DB Surplus Release: risks, rewards, & responsibilities, suggested that the proposed new flexibilities offer a "promising opportunity" to improve outcomes for all stakeholders in the right circumstances.

However, the group clarified that the proposals are "not without risk" and will not be suitable for every scheme.

In some cases, the report warned, the employer covenant will be too weak, while some schemes may be too small for running on to be cost-effective, and employers might prefer to exit their scheme to remove risk and management burdens.

It also warned that there is the possibility that trustees, after years of uncertainty around how to fund deficits, will be too wary to release surplus.

The SPP warned that major policy changes also bring the risk of unintended consequences, cautioning that, where members receive pension outcomes that differ from their expectations, based on trustee decisions, those decisions will likely face heightened scrutiny.

These factors have made efforts to quantify the financial benefits of the new rules more difficult, with estimates varying significantly.

Indeed, the SPP noted that while the government initially suggested an aggregate low dependency surplus of £160bn across the UK DB universe, the Department for Work
and Pensions later provided a much more conservative estimate of £11bn for the amount of surplus that could be released over the next 10 years.

"Ultimately, the success of these flexibilities will depend on the expertise and ambition of those managing and advising DB schemes, supported by proportionate regulatory scrutiny," SPP covenant committee member and surplus release working group chair, Alex Beecraft, stated.

Beecraft acknowledged that this may require a change in both skillset and mindset across the industry.

In particular, the SPP suggested that the new legislative regime around surplus release means that trustees and employers should review what the right long-term path is for their scheme and its beneficiaries, even for those that may not choose to use the new flexibilities.

"Many schemes may choose not to make use of the new flexibilities and to retain their existing plans, but by reaffirming their strategy, they can pursue it in greater confidence and with a lower risk of subsequent challenge," the paper stated.

First-movers, meanwhile, will want to perform and document suitable diligence before agreeing to release any surplus.

But trustees and advisors are seemingly well placed to deal with these issues, as Beecraft clarified that while the factors that influence their decision-making will vary from scheme to scheme, the core themes will be largely the same as those that trustees, employers and advisors have had to consider over the last decade to improve scheme funding and reduce risks for members.

This, he suggested, should provide confidence to all stakeholders that the risks associated with surplus release can be suitably identified, managed, monitored and often mitigated to improve outcomes for all stakeholders.

"This SPP paper serves as a useful tool to quickly, yet comprehensively, identify the risks, rewards, and responsibilities associated with surplus release," he stated.

"It should prove useful to a wide range of industry professionals, policymakers and other stakeholders, and support the DB industry’s transition from a culture of wealth preservation to one of wealth creation.”

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