The government’s proposed defined benefit (DB) pension surplus reforms need to recognise uncertainty around low dependency valuations and emerging market practice, XPS has argued.

Ahead of the government’s 2 September deadline for responses to its consultation on implementing the new DB scheme surplus regime, XPS called for a small number of regulatory changes designed to give trustees greater confidence to use the new flexibilities while protecting member security.

In particular, XPS recommended requiring trustees to consider whether low dependency remains the appropriate measure for scheme funding, as well as the type and suitability of protections in place against the risk of future underfunding.

It also called for covenant advice to be explicitly included among the categories of appropriate advice set out in the regulations.

XPS argued that these measures would give trustees a clearer framework for decision-making and reduce the risk of poor outcomes undermining confidence in the wider surplus regime.

Commenting on the proposals, XPS Group head of pension solutions, Wayne Segers, said the firm “strongly supports” the government’s proposed reforms and is already working with employers and trustees preparing to make use of the new flexibilities.

“Linking surplus to low dependency is logical, but low dependency valuations are new, and market best practice is still emerging,” he continued.

“Only time will tell if the market managed to set the bar at the right level.

“The surplus rules need to recognise this uncertainty. We are asking for the regulations to give trustees more structure around their decision-making, helping to safeguard against poor outcomes undermining confidence in the wider surplus regime.”

XPS Group head of covenant, Arabella Slinger, added that incorporating covenant and protections into a surplus policy was already a “natural part” of the approach taken by well-managed schemes.

“Reflecting this in the regulations will help trustees and employers to unlock the benefits of surplus strategies while protecting the hard-won funding improvements that have been achieved over recent years,” she stressed.

Echoing this, XPS Group head of DB run-on, Tom Froggett, argued that protecting member security and retaining flexibility for scheme-specific solutions were “entirely compatible” objectives.

“The legislation should provide clear safeguards around funding and covenant without becoming unnecessarily prescriptive,” he noted.

“That will allow trustees and sponsors to reach arrangements that reflect their scheme’s circumstances and deliver positive outcomes for all parties.”

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