New Capital Consensus Response — DWP DB Surplus Flexibilities Consultation

Response to: DWP consultation — Surplus Flexibilities for Defined Benefit Pension Schemes: Unlocking Value for Employers and Scheme Members (draft Occupational Pension Schemes (Payments to Employer) Regulations 2027) Response date: 19 August 2026 Consultation deadline: 2 September 2026 Response sent to: DWP private pensions policy team, per consultation address
Author: Dan Hedley (NCC Policy Director) advised by Gareth Thomas (NCC Policy Adviser)

Part 1 — NCC’s position

NCC’s position

NCC supports the Government’s approach to reforming the UK’s private pensions architecture — improving value, consolidating small pots, strengthening governance, and modernising both DB and DC schemes. In particular, NCC supports the package of connected measures that produce larger pools of pension savings capital deployable productively to help drive economic growth as well as deliver good returns for savers. We are particularly supportive of the measures designed to mobilise the huge sums in closed DB schemes. These measures provide more options for trustees and sponsors of closed DB schemes rather than leaving insurance as the default.

The policy fundamentals are right. It is right to end the buyout monopoly and to incentivise the quest for upside returns through productive investment. It is right to seek an appropriate balance between robust member protection and the freedom of trustees to unlock value for the benefit of both members and sponsoring employers. The proposed threshold for surplus extraction at low dependency is a reasonable metric, supported by a solid evidence base.

The measures in the Act should be an integrated package focused on delivering a strategic objective. Working in concert, they could make a real difference and move the dial on growth. They can free up sponsors to focus on their core business, deliver better outcomes for members, and create significant pools of capital that can be invested and help drive economic growth.

There is a real risk that these measures will not deliver on their potential if they are not considered as an integrated package. NCC is disappointed that this consultation treats surplus flexibilities as an isolated standalone initiative. It does not deal with how the surplus flexibilities will work in conjunction with their sister measure — the permanent legislative regime for DB Superfunds. There are significant areas in which the policy coherence between the two seems to be materially compromised. This will have real-world impacts, potentially undermining the ability of the whole package to deliver on its strategic goals.

What we welcome

• Ending the buyout monopoly. This provides a workable alternative endgame for closed DB schemes, where insured buyout has enjoyed something close to a default status.
• Productive-investment upside of running on. Running a large, closed scheme within the pensions legal framework — rather than under Solvency UK — is likely to incentivise materially more productive investment than the buyout route allows. That is a tangible benefit for sponsors, members and the wider economy.
• The low-dependency threshold itself. Setting the surplus-extraction bar at low dependency is a defensible balance between member protection and trustee freedom to unlock value. NCC does not challenge the number. It challenges the fact that the same logic has not been applied consistently elsewhere in the endgame landscape.

Where the draft regulations fail the strategy test

Absence of endgame integration. The consultation treats surplus release as a self-contained measure. It sits alongside run-on, buyout, buy-in and Superfunds — the DB Superfunds sister measure under the Pension Schemes Act 2026 chief among them — and the CP considers none of them. This undermines the effectiveness of the Government’s own diversified-endgame strategy by focusing on the tactics of one measure in isolation.

Threshold asymmetry with Superfunds. Surplus extraction is set at low dependency. Superfund profit extraction is set at a significantly higher threshold. This is the wrong way round. Superfunds are inherently more secure than sponsor-supported schemes: the uncertain sponsor covenant is replaced by a known capital buffer provided by investors, and TPR’s interim regime imposes rigorous capital adequacy requirements on top. A Superfund must additionally satisfy trustees that it offers a better prospect of paying benefits in full than the exporting scheme. None of this asymmetry is justified by policy rationale. Left as drafted, it will skew trustee choice away from the very consolidation vehicle — Superfunds — that offers the best prospect of building large pools of productive investment capital at scale.

The Gateway becomes incoherent. The Superfund Gateway is designed to prevent entry at buyout-level funding. Under the draft regulations as they stand, a scheme could fail the Gateway test, extract surplus down to low dependency, and thereby re-enter Gateway eligibility. That makes a nonsense of the Gateway. NCC’s position is as follows: remove the Gateway, and align the thresholds instead. A coherent threshold regime does the member-protection work the Gateway was meant to do, without the perverse extraction-then-re-entry route the current drafting opens up.

The three-year forward test is thin. Condition 2’s three-year forward-looking funding assessment carries the same underlying weakness as the Gateway’s proposed second limb — the prohibition on Superfund entry where a scheme is likely to reach buyout funding within a set period. Nobody can accurately predict scheme funding three years out. A test built on that prediction inherits its fragility.

NCC’s position on the consultation questions

NCC’s preference is for a narrative response over a full question-by-question submission — most of the nineteen questions are technical and process-focused, and do not engage the underlying strategic issue. NCC will, however, engage selectively where the consultation’s own architecture intersects our argument:

• Q2 (scope of the power) — the sponsor-covenant framing may make Superfunds difficult to include by construction. NCC comments on the strategic implication.
• Q3 (continued inclusion of regulatory own funds schemes) — clear parallels with Superfunds. NCC calls for threshold consistency across both.
• Q5 (funding test based on full funding on the low dependency basis) — this is where NCC’s core threshold-asymmetry argument belongs.
• Q8 (three-year forward-looking assessment, Condition 2) — NCC notes the same predictive weakness that afflicts the Gateway’s second limb, and links it to NCC’s wider campaign against short-term mark-to-market treatment of long-term risks.

Part 2 — Response to the consultation questions

NCC has focused its response on the questions that engage the strategic case for a diversified DB endgame - across buy-out, buy-in, run-on and Superfunds. The policy fundamentals are sound; the Regulations now need to work coherently across the wider Beyond Buyout landscape.

Question 2: Is the scope of the power sufficiently clear?

NCC believes that the scope needs to be clear not only in legal operation, but in strategic effect. A power framed around the continuing presence of a sponsoring employer and its covenant may make it difficult to include Superfunds by construction. While Superfunds do have a sponsoring employer, it is only a Special Purpose Vehicle with no assets to deliver a sponsor covenant — that part is played by the separate capital buffer. NCC is concerned that this distinction may be connected to asymmetric treatment of Superfunds in the standards required for surplus and profit extraction, which mitigates against these two sister measures being able to operate as part of a strategic whole.

NCC supports surplus flexibility for sponsor-backed schemes. It gives trustees a credible alternative to the buyout monopoly and enables large, closed schemes to run on within the pensions framework. That route can preserve robust member protection while supporting more productive investment than is available through an insurance endgame. But the Government’s concern here should not be to create division and difference between elements and focus merely on making one route work well. It must seek to create a diversified endgame landscape in which trustees can choose between run-on, buy-in and buyout, and Superfund consolidation on their merits, based on what they consider to be in the best interests of all their members.

DWP should state the intended boundary plainly and assess it alongside the Superfund regime. The construction of the scope here implies complete separation, rather than taking a strategic view of the whole suite of endgame alternatives and regulating for them in an integrated way that allows the measures to support each other as parts of an organic whole.

Question 3: Regulatory own funds schemes were included in the 2006 Regulations; is there a continued need for their inclusion within the Regulations?

Yes. NCC believes that Regulatory Own Funds (ROFs) should remain within a coherent surplus-flexibility framework. All similar endgame strategies in the pensions legal framework, whether supported by ring-fenced capital or by the ongoing support of sponsor covenant, should be integrated within a single coherent framework, so that they can work together and be consistent with each other. Any differences must be supported by genuine policy rationale. By the same token, if any of these architectures are to be excluded, that exclusion must be supported by clear policy thinking. NCC can see no clear policy rationale for the exclusion of ROFs.

The relevant parallel is clear. Both regulatory own funds arrangements and Superfunds move the analysis beyond a conventional ongoing employer covenant. In a Superfund, the uncertain sponsor covenant is replaced by a known capital buffer supplied by investors, subject to capital adequacy requirements and trustee assessment of whether members have a better prospect of receiving benefits in full. That structure does not weaken the case for member protection. It changes the form in which security is provided.

DWP should therefore retain the inclusion of regulatory own funds schemes while applying a common policy discipline across the endgame landscape. The treatment of a scheme’s surplus, and the conditions under which capital providers may receive a return, should reflect the security actually provided and the protections available to members. It should not produce a threshold asymmetry in which a sponsor-backed scheme can release surplus at low dependency while a Superfund, with a known capital buffer, faces a significantly higher bar before profit can be extracted.

NCC is not asking for a false equivalence between different legal forms. The Regulations should preserve the safeguards appropriate to each structure. But the underlying thresholds must be consistent in policy rationale and outcome. Otherwise, the Government risks favouring the sponsor-backed route by construction and weakening the very consolidation options needed to move beyond buyout monopoly. DWP should use this review to set out how regulatory own funds schemes and Superfunds fit within one integrated framework for member security, value release and trustee choice.

Question 5: Do you have views on the proposed funding test, based on full funding on the low dependency funding basis?

It is clearly right to seek an appropriate balance between the need for robust member protection and the freedom of trustees to unlock value for the benefit of both members and sponsoring employers. Low dependency is a reasonable metric, given that this concept underlies the successful scheme funding arrangements set out in the Occupational Pension Schemes Funding and Investment Strategy Regulations 2024 as the central long-term target for the journey plan for DB schemes. As such it has proved workable in practice, and effectively balances member protection with trustee discretion to invest appropriately.

However, there is a significant problem here, in that the Surplus Flexibilities measure is being considered as though it were a single standalone measure, whereas in fact it is part of a package of linked measures which can only deliver on their strategic goals if they are tuned to work together.

The critical omission in this consultation is to ask whether setting the threshold for extracting a surplus (low dependency) is appropriate and rational for the overall endgame option landscape, when Superfunds (as set out in the consultation response and as implemented in the Regulator’s interim regime) are required to set a significantly higher threshold for extracting a profit. No policy rationale has been set out for the differences in treatment between these two key parts of the Government’s overall package.

In our view, it is irrational for Superfunds to have a significantly higher threshold for profit extraction, considering that Superfunds are inherently more secure than mainstream sponsor-supported DB schemes.

Furthermore, the disparity between the metrics for schemes running on and Superfunds reveals a further policy incoherence. No consideration seems to have been made about how the ability to extract a surplus interacts with the Superfund Gateway. The Gateway prevents a Superfund transaction if the scheme is at a buyout level of funding. It appears that if the threshold for surplus extraction is set at low dependency as proposed here, then a scheme which fails the Gateway test could extract a surplus, reduce its funding to low dependency, and so put itself in a position to meet the Gateway test for Superfunds.

This lack of policy coherence between the two regimes puts Superfunds at a significant disadvantage, makes a nonsense of the Gateway arrangements, and will prevent Superfunds from reaching their full potential. It risks undermining the effectiveness of the Government’s integrated and multi-faceted strategy to deliver a coherent and diversified endgame strategy that delivers for all.

DWP should retain low dependency as the surplus-extraction threshold, align the Superfund profit-extraction threshold with it, and remove the Gateway. Trustees should retain discretion, within a coherent and consistently protective threshold regime, to select the endgame route that delivers the best outcome for members. That is the practical route to Beyond Buyout and real endgame effectivity.

Question 8: Do you have any comments on the proposed 3-year forward-looking assessment in Condition 2?

NCC thinks that this metric is flawed in exactly the same way as the forward-looking metric proposed in the Superfund consultation for the element of the Gateway which proposed a prohibition on Superfund entry for schemes expected to reach a buyout level of funding in the medium term (potentially up to 5 years).

This is a further example of how this consultation seems to treat Surplus Flexibilities as a standalone measure and fails to look at policy coherence and complementarity between the measures in the overall package.

Such metrics are weak because they can only ever be a matter of opinion and are therefore likely to be inconsistent and open to gaming. Nobody can accurately predict whether a scheme is likely to be at a low dependency level of funding in a few months’ time, let alone in three years, because of the inherent short-term volatility in both asset and liability measures. Similarly, in the case of Superfunds, nobody can accurately predict the price of buyout in the short term, let alone in a few years’ time.

This is why NCC campaigns against short-term mark-to-market measures of funding which effectively force long-term investments and long-term risks to be treated as a series of short-term risks. Given that pensions are inherently a long-term savings offer, such inherently flawed short-term metrics are counterproductive. And even leaving aside this important strategic context, we cannot see how an opinion-based measure of likely future asset and liability values can be an effective tool for either surplus flexibilities or for the Superfund Gateway.

DWP should replace the three-year forecast as a gating condition with a test anchored in the scheme’s current, observable funding position and the robustness of the funding and investment strategy. The existing actuarial certification and trustee decision-making framework should assess present security on the low-dependency basis, the resilience of the scheme to adverse conditions, and the effect of the proposed payment on members. The same principle should guide the Superfund Gateway. A consistently applied, present-focused threshold gives trustees clear parameters, protects members and avoids regulatory tests that appear precise but are, in practice, a bit useless.