The UK government will review the rules governing the transfer of defined benefit pensions after an asset manager used the existing law in a way regulators did not expect, taking over the assets and liabilities of the scheme using a method designed to restructure the business. Pensions minister Torsten Bell, who sits at both the Treasury and the Department for Work and Pensions, said on 16 June 2026 the government intends to review this area of law so that regulatory and safeguarding standards are in line with innovation in the pensions market. The intervention comes at the same time ministers are loosening other parts of the DB regime, creating a significant tension between encouraging investment and protecting members.
In the context of reviewing the transfer of funds, the flexible allocation system, or FAA, is a mechanism introduced by amendments to the Employer Credit Regulations from 27 January 2012. It allows an employer who leaves a multi-employer DB program to have the so-called section 75 debt redistributed to one or more successor employers under a formal agreement, which needs to be approved by law. permission. Bell said the carrier used the FAA in December last year in a way that was not initially envisioned when the rules were written, prompting the government to examine whether existing safeguards are still adequate. The Pension Regulator already requires trustees to take professional advice before agreeing to section 75 debt-changing procedures, as these procedures may affect the eligibility of the Pension Protection Fund scheme.
Running alongside the transfer update is a different and more advanced piece of change. The Government has published a consultation on draft regulations setting out new conditions for paying DB scheme surpluses to employers, following changes made to the Pension Schemes Act 2026 to facilitate the release of surpluses. That negotiation closes on 2 September 2026, with the regulations intended to come into force in April 2027. The proposed cap on the overpayment would be full funding on a low dependency basis, a reasonable relaxation from the current procurement basis. A new forward-looking feature can also come into play: the scheme’s actuary must ensure not only that the scheme sits above the lower limit of dependency on the exemption point, but that at any point within the next three years it is “at least as likely as not” to be fully funded on that basis.
The release mechanism is strengthened instead of that greater flexibility. Under the proposals, the release of the surplus would include an initial actuarial assessment of the level of funding, an agreement on an interim rate before members are notified, and at least three months’ notice to members. Then the payment will have to be made within five working days of the actuary’s last certificate, an important change in the current regime, where the certificate may stop the main payment and remain valid for up to 15 months. Trustees will be required to notify the Pension Regulator within one week of any payment, giving more details than now. Separately, HMRC will consult on changes to the Autumn Budget that allow for direct payments of surpluses to members as authorized payments, the legislative basis of which is included in the 2026-27 Finance Bill and the start of which is targeted for April 2027.
The Pensions Regulator has published an “early view” alongside the draft rules, showing how trustees should view the exemption. It expects the trustees to consider setting a residual capital policy, consistent with the scheme’s funding and investment strategy, to ensure that the board has the appropriate expertise, to maintain current information on funding and investment strategies, and to review the quality of the scheme’s data and management. The TPR also highlights aspects of the exemption decision itself, including whether a financial buffer should be held above the minimum dependency level, ongoing monitoring of the employer agreement, and whether contingent asset support is appropriate – suggesting that it may be particularly useful where the scheme is funded above the minimum dependency but below the full purchase rate. More detailed advice will follow in another TPR consultation later this year.
Taken together, these two strands indicate that the state is being rewritten in motion. Corporate sponsors, trustees and advisors planning DB end-game operations are facing new freedoms to extract value from surplus funds and increased scrutiny of credit transfers. The chief financial officers overseeing the DB’s dying obligations must plan their schemes against the proposed lower dependency limit now, model the three-year funding test, and participate in both consultations before the rules become tougher in 2027. The DB risk transfer market is being restructured in real time, and pre-emptive schemes will have the broadest set of rules that come into force when the final regulations come into effect.
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