Consultation outcome

Government response: Options for Defined Benefit schemes

Updated 29 May 2025

Foreword by the Minister for Pensions

I am pleased to publish the government’s response to the Options for Defined Benefit schemes consultation. The engagement in response to proposals on the approach to extraction of surplus in Defined Benefit (DB) schemes and a government consolidator, run by the Pension Protection Fund (PPF) has greatly helped to shape our work.

The consultation, launched under the previous administration, focuses on areas crucial to shaping the future DB landscape. That landscape has changed as the funding position of many DB schemes has improved in recent years, posing new questions for policymakers and trustees. The opportunity is there to boost growth and the pensions of working people.

As DB schemes mature, it is fundamental that trustees and sponsoring employers are supported in their choice to either run-on or secure their liabilities, while always protecting member interests. This is why we have explored the creation of a government consolidator to serve DB pension schemes.

Regulatory barriers can also inhibit the potential for surplus trapped in pension schemes to be invested in smarter ways and benefit members. We will unblock these barriers. Increased surplus flexibilities, with appropriate safeguards, will allow more well-funded DB schemes to release resources back to businesses and scheme members. This will be where trustees agree it is safe to share a surplus.

I am grateful to those who participated in this consultation to provide their valuable insights and feedback. Thanks to your efforts we have been able to consider a broad range of views across the industry and stakeholder groups. This document sets out next steps in these areas, in our response to the consultation.

Chapter 1: Background and introduction

1. This document is the government response to the Options for Defined Benefit schemes consultation that the Department for Work and Pensions launched on 23 February 2024. The consultation set out proposals for a government consolidator and flexibilities for surplus extraction. The consultation sought views on additional safeguards with respect to treatment of scheme surplus and the model for a future public sector consolidator run by the PPF. The Department received 117 responses from across the pensions industry by the closing date of 19 April 2024. Since the consultation, there have been continued discussions to determine the approach to increasing surplus flexibilities and the potential design for a government consolidator.

2. Defined Benefit (DB) pension schemes are currently enjoying high levels of funding, with approximately 3 in 4 schemes in surplus on a low-dependency basis and around £160 billion of surplus assets being held. While the DB landscape is currently very well-funded, funding can be volatile and could change in the future. The new funding arrangements and revised DB Funding Code which came into force in November 2024 underpin these proposals and help to ensure that the pensions that members have worked so hard for remain secure. Many schemes have been looking to manage the risk of future volatility and secure the improvements in funding levels. Over the last 5-6 years, there has been a greater shift towards the holding of bonds (over equities), more closely aligning movements in assets and liabilities. Additionally, there has been an increase in buy-ins and longevity swaps — reducing the risks schemes are facing.

3. In this context, there is potential for trustees to share surplus with scheme members and sponsoring employers. Many schemes are targeting buyout of member benefits with insurance providers and benefitting from the surplus funding released at this stage. Current legislation, however, prevents many schemes from benefitting from surplus funding while running their scheme.

4. As per current legislation, only DB schemes which passed a resolution by 2016 are currently able to access surplus, even if both the scheme sponsor and trustees want this. Legislative changes can remove this condition and allow schemes to modify their rules, permitting surplus extraction where there is trustee-employer agreement.

5. On surplus, the consultation explored whether a statutory override could facilitate surplus sharing in pension schemes, with appropriate protections for members’ pensions. It also asked for views on how tax rules might better support surplus sharing. Regarding member protections, the consultation sought feedback on potential funding thresholds for surplus extraction from buyout level to a low dependency basis plus a margin, as well as the introduction of clearer guidance for trustees. Additionally, respondents were asked about their views on a voluntary 100% PPF underpin, where schemes could opt to pay a higher levy in return for full protection of member benefits.

6. We are committed to introducing measures to make surplus extraction easier for trustees, where they choose to do so, with stringent safeguards. Earlier this year, the Prime Minister outlined at a business roundtable how restrictions will be lifted on well-funded, high-performing DB pension schemes to enable them to share their surplus funds.

7. The changes to surplus sharing will give trustees of DB pension schemes access to their surplus to benefit both employers and members. Employers could use this funding to invest in their business, increase productivity, boost wages or utilise it for enhanced contributions in their Defined Contribution (DC) schemes. Schemes could also use funding to unlock increased benefits for scheme members, including through providing discretionary benefit increases. The Pensions Regulator (TPR) has acknowledged in its most recent funding statement that schemes are facing increased calls for such increases.

8. The government wants to ensure that DB pension schemes can take advantage of consolidation and scale. Greater consolidation of the DB landscape can be expected to deliver economies of scale leading to better governance and improved outcomes for members and benefit to the wider economy, as well as freeing-up sponsoring employers to focus on growing their business, having first secured their pension liabilities.

9. Currently, the DB landscape is fragmented. Around 70 schemes hold close to 50% of DB assets compared to the smallest 2,000 schemes holding, collectively, around £10 billion (1%) of DB assets. These smallest schemes will still importantly provide retirement incomes for around 100,000 members. All schemes need to have choices for managing their DB legacy liabilities. The DB market is rapidly evolving. Many schemes, including small well-funded schemes, are moving to buyout and securing member benefits. The introduction of a permanent legislative regime for superfunds provides additional options for schemes not funded to buyout level.

10. On the government consolidator, the consultation explored the approach to eligibility, focusing on schemes unable to access commercial options. It considered limits on the consolidator’s size, the structure of a single pooled fund, and whether underfunded schemes and schemes in surplus should be segregated. Views were sought on governance by the PPF, taking a funding approach similar to superfunds, and mechanisms for managing deficits and surpluses. The consultation also considered investment strategies balancing prudent funding with productive finance, and potential underwriting models, including PPF reserves or government backing. We received a range of responses from stakeholders across the spectrum of the pensions industry.

Chapter 2: Executive summary

11. We are committed to ensuring the pensions market continues to serve its purpose and have proposed several changes to ensure long-term sustainability and security for DB schemes while unlocking their ability to secure better pension outcomes for members. Legislative changes will give greater confidence and powers to trustees of DB schemes to make informed decisions regarding the surplus within their schemes. The government consolidator could provide an option for schemes where there are barriers to accessing commercial consolidation. The government’s commitments on both these proposals are in line with the UK’s growth agenda.

Executive Summary of consultation responses

12. Our proposals on surplus were broadly welcomed by trustees, employer representative groups, some professional advisers, and consultancies. Respondents were broadly supportive of proposals to unblock surplus sharing in schemes, believing surplus extraction should only be an option when a scheme is at a suitably prudent funding level. Respondents favoured introducing a statutory power for the modification of scheme rules over a statutory power for making payments.

13. Respondents emphasised that any statutory override should have robust safeguards to protect member benefits. They supported the introduction of guidance by TPR for trustees when considering surplus extraction. Respondents highlighted trustee duties to scheme beneficiaries and the additional legislative requirement that surplus extraction be in the “interests of the members” as barriers to surplus extraction.

14. Caution was expressed at the potential unintended consequences of changes to the tax regime intended to facilitate increased surplus sharing. Concerns were also raised regarding the 100% PPF underpin – a proposal that would allow schemes to purchase 100% protection from the PPF in exchange for an additional “super levy” above their regular pension protection levy liability.

15. Respondents from across stakeholder groups, including some employers, consultancies, law firms, and trustee groups supported the introduction of a government consolidator with clear and prescriptive criteria that minimises market distortion. However, some insurers, actuaries and consultancies remain unconvinced of the need for government intervention and highlighted the risk of potential market distortion.

16. Respondents cautioned that the consolidator needs to be careful not to create ‘winners and losers’ amongst scheme members. The concern was that benefit standardisation, if introduced in the consolidator, could leave some members with reduced benefits. Some respondents agreed that a consolidator would be most valuable for schemes which struggle to access an appropriate solution from the commercial market. Respondents agreed that the size of the consolidator should be limited but suggested this could be done through setting appropriate eligibility criteria rather than explicitly limiting the size.

17. Respondents supported the government consolidator operating as a single pooled fund on a run-on basis for solely closed schemes. Underwriting the risk of the consolidator was a key concern particularly for members and pension protection levy payers. Many respondents believed any surplus from the consolidator should be returned to the underwriters, referring to the mechanism in superfunds where surplus is returned to the provider of capital providing it does not compromise the security of member benefits. There was agreement that a sufficiently prudent entry price should be set to account for risks while maintaining affordability for schemes. Respondents noted that the funding and investment strategy for the consolidator should allow for investment in UK productive assets while maintaining a sufficient level of prudence.

Executive summary of the government response

18. Following consideration of the responses to our consultation and in line with the government’s growth agenda, we propose to take forward the following.

19. We will amend the existing framework for surplus extraction from DB schemes to remove barriers to extraction, while maintaining stringent funding safeguards to protect member benefits. First, we will introduce a statutory resolution power for trustees of schemes to modify their scheme rules. Use of this power will be at the discretion of the trustees, who remain best placed to make decisions in the context of their individual scheme circumstances and their duties to scheme beneficiaries.

20. We are minded to amend the threshold at which trustees are entitled to share surplus with the sponsoring employer from the current buyout threshold to a threshold set at full funding on the low dependency funding basis. Further detail will be set out in draft regulations, on which we will consult. Extraction of surplus will remain subject to trustee discretion and actuarial certification. This brings additional scheme surplus into scope for extraction, while maintaining a sufficiently prudent approach.

21. The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, which were laid last year, provide a greater emphasis on long term planning, so schemes are required to have a funding and investment strategy, and to reach low dependency on the sponsor by the time they are significantly mature. Low dependency is a robust and prudent measure of funding strength. If a scheme is fully funded on this basis, it is expected that there will be enough resources to pay the member benefits in full without any further support being required from the sponsoring employer.

22. There is a lack of clarity as to whether the requirement in section 37 of the Pensions Act 1995, that trustees be satisfied that surplus extraction is “in the interests” of members, is additional to trustees’ underlying duties to scheme beneficiaries, which safeguards member interests across all decisions.

23. We will amend section 37 to clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged. This provides robust protection to scheme members and is the most important safeguard for member interests. The rate of taxation applicable to surplus extracted from DB schemes will remain at 25% and we are continuing to consider the wider tax regime for surplus extraction. We will work with TPR to develop guidance with respect to DB surplus extraction, reflecting feedback that guidance is required in this area to facilitate trustee comfort with extraction.

24. We do not consider that an opt-in 100% PPF underpin is appropriate due to the high cost and moral hazard concerns. Additionally, we do not believe the underpin is necessary to encourage schemes to extract surplus. We therefore do not propose introducing this underpin.

25. On the government consolidator, commercial buyout providers will offer a solution for many DB schemes, but this may not work for every scheme and so we are continuing to explore what role a government consolidator could play. A small, focused government consolidator, administered by the PPF, could offer an alternative solution for schemes and has the potential to help to address a fragmented pensions landscape.

26. Despite significant funding improvements across the DB landscape, there remains 100s of schemes (accounting for 100,000s of members) which remain significantly underfunded (75% or less of buyout). These present a risk, especially for those schemes that are most mature.  A consolidator could provide an option for underfunded schemes, as they are unlikely to be able to access commercial solutions. These sponsoring employers for schemes transferring to the consolidator would need to continue to meet their pension liabilities. A consolidator would therefore require an appropriate structure that ensures liabilities for schemes remain with the sponsoring employer until the funding deficit is made good.

27. In addition to underfunded schemes, the government has considered through the consultation whether other segments of the market are less well served so a consolidator could add value, without competing with existing solutions.

28. There is evidence that some smaller, well-funded schemes have faced challenges in buying out benefits with the commercial market. TPR’s recent survey found one-in-three small/micro schemes considering buyout had encountered difficulties^{[footnote 1]}. However, there is also evidence that the market is rapidly changing with new market entrants and innovation in serving smaller schemes. This has helped see the largest growth in buyout transactions for small schemes – LCP report over three times the number of deals under £100 million completed in the past 12 months compared to three years ago^{[footnote 2]}. Alongside this market development, the permanent legislative regime for superfunds in the Pension Schemes Bill will provide options for well-funded schemes that are not funded to buyout level.

29. Given these developments, we are continuing to consider how a consolidator could be additive to complement rather than compete with existing options in the DB market. We will further consider the possible role for a consolidator, taking the time to monitor and understand the impacts from current market changes. We will not be legislating for the consolidator in the forthcoming Pension Schemes Bill.

Chapter 3: Treatment of scheme surplus

30. This chapter focuses on the proposals in the consultation for the treatment of DB scheme surplus, which covered a potential statutory override of scheme rules, taxation considerations, safeguards for member benefits, and a potential 100% PPF underpin.

31. In our consultation, we asked respondents whether a statutory override could help remove barriers to surplus sharing. In addition to this, we considered whether a statutory power should be introduced for the amendment of scheme rules to share a surplus or to authorise payments directly.

32. Feedback was sought from respondents on how the tax regime could better support surplus sharing while ensuring that surplus continues to be taxed at an appropriate level.

33. On member protections, we consulted on the appropriate threshold above which surplus could be extracted. The consultation posed a question on whether additional guidance should be introduced for trustees through either adding to the existing ‘Funding Defined Benefits’ code of practice, introducing a separate code, or issuing TPR guidance.

34. Respondents were asked about an opt-in 100% PPF underpin where schemes could choose to pay a higher “super levy” in exchange for full member compensation in the event of the sponsoring employer failing to meet their funding obligations in respect of the scheme.

35. Since the consultation, we have further developed the detail on how to facilitate surplus sharing from DB pension schemes and set this out in our response.

Statutory override

We asked:

Question 1: Would a statutory override encourage sharing of scheme surplus?

Question 2: What is the appropriate balance of powers between trustees and employers? Should a statutory override allow trustees to amend scheme rules around surplus at their sole discretion, or should such amendments be contingent on an agreement between trustees and the sponsoring employer?

Question 3: If the government were to introduce a statutory override aimed at allowing schemes to share surplus with sponsoring employers, should it do so by introducing a statutory power to amend scheme rules or by introducing a statutory power to make payments?

Question 4: Should the government introduce a statutory power for trustees to amend rules to enable one-off payments to be made to scheme members, or do schemes already have sufficient powers to make one-off payments?

Question 5: What impact, if any, would additional flexibilities around sharing of surplus have on the insurance buyout market?

Respondents said:

A statutory override would remove barriers to the sharing of surplus. Respondents favoured a statutory power to amend scheme rules rather than a statutory power to make payments.

36. There was significant agreement from respondents that a statutory override to remove barriers and restrictions in scheme rules could help schemes to access surplus sharing. Some stipulated that a statutory override would not necessarily encourage surplus sharing in isolation and that other changes would need to be made to unblock this. Scheme-specific conditions like the funding position and restrictions in the scheme rules were referred to as potential blockers.

37. Respondents highlighted the need for clear guidance for trustees to provide them with the confidence to make informed decisions about surplus extraction. Other respondents felt that even with additional support, barriers to surplus sharing would remain.

38. The majority of respondents expressed support for a statutory override which would make it easier to share scheme surplus. They noted wider advantages such as the potential to increase UK long-term investment and the capacity for employers to benefit from surpluses in DB schemes.

39. Respondents supported roles for both trustees and employers in surplus extraction. They highlighted that surplus sharing was the joint responsibility of the employer and trustees. It was noted that a healthy balance of interests should be maintained.

40. Several respondents flagged how joint authority for a statutory override could compromise the power that trustees have in their role. Several responses highlighted that the balance of power would be set out in scheme rules. Despite this, it was noted that the employers would still likely agree to removing barriers to access surplus.

41. Many respondents suggested introducing a statutory power for schemes to make one-off payments to their members. Some responses noted that many schemes have the necessary powers to make one-off payments and that the government’s focus should be on amending tax legislation to treat one-off payments as authorised payments. Respondents raised issues regarding intergenerational fairness since deferred members are exposed to greater risk than pensioners in receipt of payments.

42. Regarding the effect on the insurance buyout market, many respondents anticipated changes but were uncertain about the exact nature and extent. A significant number believed that most schemes would continue to aim for buyout. Many respondents anticipated that new flexibilities could encourage more schemes to run-on, with smaller schemes more likely to target buyout.

Statutory override: government response

43. The benefits of a statutory override in expanding the pool of schemes with the ability to share surplus with employers are recognised. We will introduce a statutory power for trustees to modify their scheme rules to provide for surplus sharing, where existing scheme rules do not allow for this. We consider that trustees are best placed to decide whether to modify their scheme rules in line with scheme-specific circumstances. We consider this approach, as opposed to a statutory power for trustees to make payments, gives appropriate discretion to trustees in the context of their duties to scheme beneficiaries. We will also repeal the requirement for trustees to previously have passed a resolution under section 251 of the Pensions Act 2004 to share surplus. We will not mandate how extracted surplus is used.

44. We note respondents’ comments with respect to the merits of a statutory power allowing for direct payments to members and will continue to consider this. Trustees will continue to be responsible for negotiating with their sponsoring employers as to how members should benefit from surplus extraction and have a suite of options to consider, such as benefit augmentation.

Taxation

We asked:

Question 6: What changes to the tax regime would support schemes in delivering surpluses to distribute as enhanced benefits?

Question 7: Are there any other alternative options or issues the government should consider around the treatment of scheme surplus?

Respondents said:

Changes to the tax regime would facilitate the distribution of surplus but careful consideration is needed to prevent unintended consequences.

45. Many responses suggested tax legislation changes so that one-off payments made to members are treated as authorised payments for tax purposes. Some respondents suggested this would encourage the sharing of surplus, while others did not see tax arrangements as a major factor in surplus sharing decisions.

46. Some respondents viewed current tax rules as encouragement for long-term saving and preventing the abuse of pension schemes. They flagged how an effort to remove or amend these rules may bring unintended consequences like the creation of loopholes. Respondents cautioned that any effort to change tax rules should consider unintended consequences to ensure fair treatment for all.

47. Respondents expressed support for changes to the treatment of surplus but believed there were other options to consider.  A frequent suggestion was changing tax rules so that employers do not pay tax on surplus payments. Some respondents referenced the tax rate on lump sum surplus payments to employers being reduced from 35% to 25%. Respondents suggested that the removal of any tax charges should be conditional on, for example, the use of DB surplus to enhance DC schemes, even when these are in separate trusts. Pensions professional groups suggested different tax rules such as a flat rate on lump sums with no impact on annual allowance charges.

Taxation: government response

48. We believe the pensions tax framework is broadly balanced and fair. From April 2024, we reduced the tax payable on DB surplus returned to the employer from 35% to 25%. We are continuing to consider the tax regime for surplus extraction.

Safeguards for member benefits

We asked:

Question 8: Under what combination of these criteria should surplus extraction be permitted? If you feel alternative criteria should apply, what are they?

Eligibility criteria for surplus extraction under consideration included:

• Funding above the low dependency funding basis plus a fixed margin, for example, above 105% of the low dependency basis.

• Funding above the low dependency funding basis plus a variable margin based on investment risk, for example, above 100% + y% of the low dependency basis, where y is determined by the level of investment risk in the scheme.

• A covenant requirement, for example only allowing access to surplus where funding is above the low dependency funding basis plus a fixed margin, and the strength of the employer covenant is considered sufficient to offset any additional risk posed to members.

• Maintain a buyout funding level threshold.

Question 9: What form of guidance for trustees around surplus extraction would be most appropriate and provide the greatest confidence?

Question 10: What might remain to prevent trustees from sharing surplus?

Respondents said:

There was no consensus on a specific threshold above which surplus extraction should be permitted. Respondents noted surplus extraction should be subject to a prudent funding threshold. Respondents also noted the merits of guidance on surplus extraction from the Pensions Regulator.

49. Although there was no agreement on what combination of criteria surplus extraction should be permitted under or what the threshold should be, there was clear consensus that safeguards to protect member interests are needed.

50. While some respondents suggested the surplus extraction threshold should remain at buyout level, respondents most frequently suggested the threshold should be set with respect to the low dependency funding basis.

51. Some respondents suggested additional prudence in the form of margins above full funding at low dependency. Responses varied on what the margins should be, with some referencing investment risk.

52. Respondents cautioned around setting the threshold too high or low. They suggested that a significantly lower threshold could result in surplus extraction causing the scheme to become underfunded and a prohibitively high threshold could prevent a surplus from being accessed even where there was a low risk of compromising member security.

53. Respondents highlighted the pressure trustees may feel to share the surplus if their scheme is above the stated threshold which allows this. They believed this pressure could limit trustees’ freedom to use surplus for other purposes.

54. Respondents agreed that guidance should be created for trustees to follow on surplus extraction. A common suggestion was that the guidance should be provided by TPR. There were several suggestions on exactly what type of guidance should be issued. Many respondents supported guidance in the form of a code of practice. There were differences in opinion on whether surplus extraction should be part of existing code. A standalone code was seen by some respondents as being more suitable. Some respondents preferred guidance outside a code of practice that could more easily be updated.

55. Regarding the remaining barriers that prevent access to surplus, a significant number of respondents referred to trustee duties as the largest barrier. Respondents, including many trustee groups, flagged the need to prioritise the security of member benefits above all else. They also believed that while the existing statutory requirement for surplus extraction to be “in the interests of members” remained in place, surplus sharing would remain low.

Safeguards for member benefits: government response

56. We are minded to amend the threshold at which trustees are entitled to share surplus with the sponsoring employer from the current buyout threshold to a threshold set at full funding on the low dependency funding basis. Further detail will be set out in regulations, on which we will consult. This is a robust and prudent threshold at which to consider surplus extraction and aligns with the existing statutory regime, which requires trustees to target full funding on a low dependency basis. Extraction of surplus will continue to be subject to actuarial certification of funding adequacy.

57. There is a lack of clarity as to whether the requirement in section 37 of the Pensions Act 1995, that trustees be satisfied that surplus extraction is “in the interests” of members, is additional to trustees’ underlying duties to scheme beneficiaries, which safeguards member interests across all decisions. We will amend section 37 to clarify for trustees that they must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged. Trustee duties are the most important safeguard for member interests and will remain unchanged. Trustees will remain responsible for negotiating with sponsoring employers regarding possible benefits to members from surplus extraction. This arrangement strikes the correct balance between giving trustees the flexibility to share surplus with the employer (where this is appropriate) and safeguarding member interests.

58. It is imperative that trustees continue to make surplus extraction decisions in the context of other, wider considerations, including the strength of the employer covenant and the potential for members to benefit from surplus extraction. We will bring forward the details of the revised funding threshold for surplus extraction in regulations, on which we will consult, and will work with TPR to develop and publish guidance with respect to DB surplus extraction, following the passage of legislation.

Alternative safeguard: a 100% PPF underpin

59. This section of the consultation sought feedback on a potential 100% PPF underpin. Under this proposed arrangement, trustees of DB schemes could opt to pay a higher “super levy” to the PPF in return for 100% coverage of scheme liabilities in the event a scheme were to enter the PPF.

We asked:

Question 11: Would the introduction of a 100% underpin have a material impact on trustees’ and sponsors’ willingness to extract surplus? If so, why and to what extent?

Question 12: Are there other benefits to a 100% underpin that the government should consider?

Question 13: If you consider a 100% underpin could deliver valuable benefits, what does the government need to prioritise to ensure an effective design? For example, does the way the “super levy” is calculated need to ensure that the “super levy” is expected to be below a certain level? How high a level of confidence does there need to be that the PPF will be able to pay a 100% level of benefits?

Question 14: Are there other methods outside of the PPF that could provide additional security to schemes choosing to run-on?

Respondents said:

Offering schemes the option to opt-in to a 100% PPF underpin would not be effective in facilitating surplus extraction, given the high cost to individual schemes and the capacity for moral hazard risk.

60. Some respondents believed a 100% underpin could impact the sponsor and trustees’ willingness to extract surplus. They viewed the impacts positively and suggested that it could encourage longer run-on or act as an incentive to increase investments into productive assets with more risk-taking. However, many respondents did not believe it was feasible from a cost perspective unless it was made mandatory or offered to all schemes.

61. Many respondents believed that a 100% underpin was not viable or necessary or would not bring enough benefit to justify it. A significant number of respondents believed a surplus could be paid out without the need for a 100% underpin.

62. Regarding cost, a significant number of respondents stated that the super levy needed to be affordable for the 100% underpin to be attractive to schemes. The PPF levy is already considered expensive to many employers. Respondents considered the 0.6% of buyout liabilities cost mentioned in the consultation to be prohibitively expensive, deterring take-up of an underpin by schemes.

63. Respondents also highlighted potential moral hazard risks from an opt-in 100% PPF underpin, including concerns that investors could behave recklessly in the knowledge that an underpin would cover all member benefits. This could also undermine the emerging superfund market or create a two-tier system within the PPF.

64. Respondents also flagged that the current legal framework instructs trustees to not consider the PPF when making investment decisions. They highlighted that this would need to be changed to make a 100% PPF underpin viable.

65. Respondents agreed that using PPF reserves to fund a 100% underpin would be inappropriate. Respondents believed that the government should encourage the use of existing methods. Suggestions for methods outside the PPF that could convince schemes to run-on include bank guarantees, escrow accounts, surety bonds, contingent assets, parent company guarantees, and insurance policies.

Alternative safeguard: a 100% PPF underpin: government response

66. We do not consider that an opt-in 100% PPF underpin is feasible on the basis that it would be unaffordable for most schemes. Furthermore, there remain concerns regarding the potential for a 100% PPF underpin to create moral hazard in the DB universe. For these reasons, and as we do not think it is necessary to underpin surplus use, we do not propose introducing an opt-in 100% PPF underpin.

Treatment of scheme surplus: government response

67. We recognise the legislative barriers currently in place preventing surplus in DB schemes from being shared. Section 251 of the Pensions Act 2004 requires trustees to have passed a resolution prior to 6th April 2016 for a scheme to be able to pay surplus to an employer. No payment of surplus can currently be made in the absence of a section 251 resolution. Furthermore, not all schemes contain in their rules a power to share surplus with the sponsoring employer.

68. We will legislate for a power for scheme trustees to modify the scheme by resolution to provide for surplus sharing with the sponsoring employer. We will also repeal the requirement that schemes have passed a resolution under section 251 of the Pensions Act 2004. This will bring additional schemes in scope of potential surplus extraction. We will not mandate how extracted surplus is used.

69. We are minded to legislate to replace the existing buyout threshold for surplus extraction with a new threshold set at full funding on the low dependency funding basis. Sharing of surplus will continue to be at the discretion of scheme trustees and subject to actuarial certification. Further detail will be set out in draft regulations, on which we will consult.

70. We understand that it is vital for trustees to make decisions, including regarding surplus payments, in accordance with their duties. There is a lack of clarity as to whether the requirement in section 37 of the Pensions Act 1995, that trustees be satisfied that surplus extraction is “in the interests” of members, is additional to trustees’ underlying duties to scheme beneficiaries, which safeguards member interests across all decisions. We will amend section 37 to clarify for trustees that they must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged. This will not reduce the security of member benefits and strikes the correct balance between flexibility for trustees and the safeguarding of member interests. The government will ensure that robust protections stay in place to protect member benefits.

71. The potential for members to benefit from any surplus shared with the sponsoring employer must remain a key consideration for trustees and is vital to the success of this policy. The government will work with TPR to develop guidance regarding surplus extraction. This guidance will reference a suite of options open to trustees to bring benefits to members from surplus sharing.

72. We do not propose to introduce a 100% underpin funded by an opt-in “super levy”. The risks flagged by respondents around the high cost to schemes, the potential for moral hazard from employers, and the low likelihood of meaningful impact to surplus sharing all contribute to this decision. Based on the responses received in this consultation, we do not believe a 100% underpin is currently needed for increased surplus extraction by trustees in DB schemes.

73. The government will bring forward the required legislative changes as part of the Pension Schemes Bill 2025 and associated regulations, following consultation.

Chapter 4: Model for a Public Consolidator

74. This chapter focuses on the proposals for the model for a government consolidator that would be run by the PPF. This is referred to as the public sector consolidator in the consultation.

75. DB schemes should be supported with options to run-on or secure their liabilities. Given the number and scale of schemes likely to seek endgame solutions over the next few years, the consultation considered that not all of the market were likely to have a practical option for consolidation (particularly smaller schemes and those less than fully funded). This is why we explored the creation of a government consolidator to serve DB pension schemes where it is appropriate for schemes most in need of consolidation. The questions outlined in this chapter of the consultation covered important aspects of operating a government consolidator.

76. The consultation covered questions on setting eligibility criteria or an explicit size limit for the consolidator where the entry of a scheme into the consolidator is considered on the basis that it demonstrates an inability to access other options such as joining a commercial consolidator or securing insurance buyout. In addition to this, we sought views setting an explicit limit on the size to which the consolidator could grow or on how much it could consolidate to mitigate concerns regarding overexpansion beyond its scope.

77. It sought views on whether operating as a single pooled fund on a “run-on” basis was the right approach to take. The consultation asked whether underfunded schemes should be segregated from those in surplus to avoid potential cross-subsidy, and whether this model may appeal to schemes who are unable to access commercial consolidation. Views were also sought on whether the consolidator should be accessible to both open or closed schemes or limited to the latter.

78. On governance, the proposal was for the consolidator to be administered by the PPF on a ringfenced basis. We asked whether this structure would provide adequate public confidence and oversight. Respondents were also asked for suggestions on alternative governance arrangements. Views were sought on the funding approach, pricing and how any surplus in the consolidator should be used.

79. For schemes entering the consolidator with a funding deficit, the consultation proposed introducing repayments plans for the sponsoring employers. Respondents were asked how schemes in deficit could be monitored to ensure their risks to the consolidator are mitigated. For schemes in surplus, the consultation also considered possible mechanisms for utilising the surplus, such as for potentially enhancing member benefits. It asked questions on the appropriateness of an investment strategy for the consolidator.

80. Regarding the question of how the consolidator should be underwritten and structured, the consultation asked whether it should be through PPF reserves, by the government, or another mechanism.

81. Since the consultation, we have developed our policy thinking around these elements. We have summarised the views we received, and our response is below.

Approach to eligibility

We asked:

Question 15: Would the proposed approach to eligibility allow schemes unattractive to commercial providers to access consolidation? Would it be attractive to such schemes?

Question 16: Is setting the consolidator a duty to accept transfers from schemes unattractive to commercial providers and mandating certain design features (for example, benefit standardisation) and ensuring no unfair advantage sufficient to limit impacts on commercial alternatives? If not, what alternative approaches would you recommend?

Question 17: Would a limit on the size of the consolidator be needed? If so, how might a limit on the size of the consolidator be set? Would limits on capital and a requirement to meet the same capital adequacy requirements as commercial consolidators suffice, or are there alternatives?

Question 18: How in practice might the public sector consolidator assess whether a scheme could access a commercial consolidator?

Question 19: On what basis should the public sector consolidator be entitled to reject schemes from entering?

Question 20: Do you have additional views on the expected characteristics of the consolidator outlined above?

Respondents said:

Eligibility should be established with clear and prescriptive criteria. The criteria set for the government consolidator should minimise market.^ distortion.

82. While respondents broadly welcomed the proposals for a government consolidator, some expressed reservations, arguing that there was sufficient capacity in the current market and that quotes from insurers were available to the full range of schemes. 

83. Respondents noted that the consolidator is likely to appeal to small schemes. Some respondents viewed that the government consolidator could be considerably attractive to schemes because of having competitive advantage. An example was the perceived security from being administered by the PPF, a government body, which could be seen to have a lower risk of failure due to implicit state backing. Other advantages mentioned were dependent on government underwriting. These included competitive pricing which could lead to the consolidator being more affordable and desirable to schemes compared to insurance buyout, and the potential for a higher expected return from strong investment strategies and economies of scale. In contrast, many respondents added that it would not be possible to know how attractive the consolidator is until entry criteria and underwriting had been established.

84. Some respondents noted that the consolidator would not be attractive or attainable for the schemes who are unable to afford the entry price or recovery plan.

85. Many respondents supported the government consolidator if it targeted schemes that were underfunded or considered unattractive to commercial providers. However, there were some respondents who believed targeting anything beyond this is market intervention without sufficient demonstration of market failure which could be disruptive.

86. Some responses, mostly from insurers and consultancies, questioned the need for the consolidator, suggesting the government should focus on improving the current market to stimulate competition and serve schemes more effectively. Some respondents questioned whether the proposed consolidator would help boost investments in productive finance assets to a significant extent or whether there is opportunity to do more.

87. Several respondents suggested that the less competitive pricing available to certain schemes might be caused by poor administration or outsourcing. Respondents mentioned factors prevalent in some schemes which make them less desirable to insurers or unlikely to pursue buyout in the current market. These include poor-quality data, underfunding and illiquid assets.

88. Some pensions professional groups stated that while small schemes may struggle to receive a quote from some insurers, this is either a shrinking problem in the pensions market or they noted that even with some delay caused by additional administrative work, schemes eventually receive a quote.

89. Legal advisers challenged the government to ensure that the establishment of a government consolidator was compliant with the obligations arising from competition law. This was in reference to competing with rest of the buyout market. Additional reference was made regarding compliance with state aid (now the UK subsidy control regime). They also suggested a flexible approach to setting eligibility criteria to respond to emerging market trends and maintain its desirability to schemes.

90. Most respondents agreed that setting appropriate eligibility criteria would help to control the size of the consolidator without having to explicitly limit the capacity of the consolidator. For schemes who meet entry criteria, most respondents did not believe they should be rejected from the consolidator.

91. Some stakeholders, including many pensions professional groups, were concerned about ‘scope creep’. This is where schemes outside of the original scope of the consolidator may enter as the entry requirements change or are relaxed over time. Respondents suggested that to prevent unqualifying schemes from accessing the consolidator, eligibility rules for the consolidator should require schemes to demonstrate an inability to access commercial solutions.

92. Some respondents suggested a third party or scheme actuary should assess a scheme’s funding position and provide certification before entry. However, there were concerns from other respondents, such as legal advisers, that the costs and logistics of this assessment would be burdensome and may deter schemes within scope from accessing the consolidator.

93. Respondents spoke about setting clear and prescriptive criteria to ensure the consolidator is targeting the schemes who are genuinely unable to access a commercial route. There was no agreement on what entry criteria would be appropriate for schemes to demonstrate. There was a suggestion that variation on eligibility could help provide market stabilisation to address concerns around its distortion.

94. There was mixed support that eligibility should be based on the funding position of a scheme with those against their inclusion showing concern around member security. Respondents mentioned that from the information available regarding market conditions, it would be difficult to establish hard criteria on scheme funding level or size.

95. Most consultancies and insurers who responded believed that it is not the scheme size directly that means schemes are unable to secure their benefits with an insurer. They instead said that common characteristics make them less desirable or more difficult to transact with (poor-quality data, underfunding and illiquid assets) as mentioned previously.

96. There were mixed opinions on whether underfunded schemes should be able to access the consolidator. This is outlined in the ‘treatment of schemes with funding deficits or surplus funds’ section.

97. Several respondents including some consultancies and law groups recommended setting a limit to prevent market distortion or concentration of risk. Some similar concerns from respondents were that the ability to accept underfunded schemes would give the consolidator a significant advantage over commercial providers, suggesting gateway tests should be introduced to limit impact.

98. Regarding restricting the consolidator to schemes unable to access commercial consolidation only, consultancies were amongst the respondents who questioned whether this would have significant impact on the extent of investment in UK productive finance.

99. Those who were against limiting the consolidator mentioned restrictions being against the aims of supporting high-growth UK assets or schemes being unable to access the consolidator because it had reached capacity or encouraging a first-come first-served approach rather than serving schemes most in need of consolidation.

Approach to eligibility: government response

100. A private pensions market that encourages consolidation and offers solutions for closed DB schemes will play a key role in driving this government’s priorities. The commercial market will offer solutions through buyout and consolidation.

101. We are continuing to explore the best approach to establishing a consolidator that could complement the existing market. We have seen significant innovation and development of the buyout market, especially at the smaller scheme end. As the DB landscape evolves, we expect the market will continue to innovate. Our reforms, including those we have announced on surplus flexibilities and a permanent legislative regime for superfunds, are delivering more options and will help to drive growth.

102. We expect that buyout will remain the favoured option for employers who want to meet their obligations to their pension members but break from their legacy DB liabilities. Superfunds will provide an alternative solution for employers of schemes with lower funding levels, for whom buyout is inaccessible. It is expected that the capacity of the superfund market will grow which will provide a commercial option for an increasing number of schemes unable to access buyout with insurers.

103. Funding levels continue to rise across the DB universe, and we expect a reduction in the number of underfunded schemes. However, we understand that existing options may not be viable for every scheme. That is why we continue to explore the role a small, focused government consolidator could play, if created.

104. A consolidator could serve as an alternative option for schemes and have the potential to help address a fragmented pensions landscape. Despite notable improvements in funding across the DB landscape, hundreds of DB schemes, representing 100,000s of members, remain significantly underfunded, with funding levels at 75% or below of buyout levels. These underfunded schemes, particularly the most mature, continue to pose a risk to the PPF and commercial solutions are unlikely to be available to them. The consolidator could provide a viable option for underfunded schemes. The consolidator would need to be structured to require the sponsoring employers to continue to meet their obligations to fund their pension liabilities.

105. We have considered whether there may be opportunities for a targeted consolidator with a larger scope, to focus on other schemes who are less able to secure buyout from commercial options.

106. In our consultation, we also asked about small schemes, however the evidence to support the case for a consolidator is much less clear for this sector. The Pensions Regulator’s survey offers some insights on how trustees view a government consolidator. 12 per cent of trustees said that their scheme would be likely to enter a consolidator. This was more prevalent among smaller schemes1. There have historically been challenges encountered by smaller schemes, with a smaller number of insurers serving this market and scheme-specific issues including poor administration. TPR’s recent survey found one-in-three small/micro schemes considering buyout had encountered difficulties^{[footnote 1]}. In many reported instances, the smaller the scheme the greater the potential challenge. Some reports (e.g. PwC^{[footnote 3]}) suggest that the market starts to become more challenging below £50 million. More recent market data shows that insurers are transacting with schemes across the spectrum and that four insurers now offer streamlined services to small schemes accessing buyout to accelerate deals^{[footnote 4]}. This has helped see the largest growth in buyout transactions for small schemes.

107. In addition to underfunded schemes, we are considering whether a consolidator could add value to other segments of the DB market where they are less well served, but will need to assess how intervention for these segments, and potentially others, can play a valuable and additive role in the DB market. There may be opportunity for a wider scope in the consolidator that considers the eligibility of small, well-funded schemes. We understand there is more to do on the approach to eligibility and determining how a consolidator could complement the emerging market rather than compete. We continue to assess whether these other segments of the market can benefit too, though the case is less clear than for underfunded schemes. We propose taking further time to determine this, taking the time to monitor and understand the impacts from current market changes. We will not be legislating for the consolidator in the forthcoming Pension Schemes Bill. 

108. Although, as highlighted above the government is considering further the possible role for a consolidator, a significant amount of design work has been done, alongside the PPF, in response to the consultation. It has considered the feedback to understand how a consolidator could work. This is set out within the following sections under the consultation questions.

Proposed model

We asked:

Question 21: Do you agree that the consolidator should run as a single pooled fund and operate on a “run-on” basis rather than target insurance buyout? If not, what alternative structure or operating basis would you propose?

Question 22: Should underfunded schemes be segregated to avoid potential cross-subsidy with other schemes?

Question 23: Would schemes unattractive to commercial consolidators be attracted to a public sector consolidator given the model proposed above?

Question 24: Should open private sector DB schemes be eligible to enter the consolidator? Should the focus be on closed schemes specifically?

Respondents said:

The government consolidator should operate as a single pooled fund on a run-on basis with only closed schemes being able to access the consolidator. Care should be taken regarding the inclusion of underfunded schemes to prevent member security and the consolidator itself being compromised.

109. Most respondents agreed to the consolidator operating as a single pooled fund on a run-on basis to drive economies of scale. There was a suggestion that this operating model could be retained until the liability profile of the consolidator is significantly mature but with no specific mention of how it would continue beyond this. Those opposing the run-on approach believe that buyout should be targeted.

110. There were some opposing views for including underfunded schemes in a single pooled fund. Some consultant groups stated that this could potentially reduce the benefit that the consolidator provides. If underfunded schemes were eligible and included in the consolidator, some respondents believed they should be segregated to avoid potential cross-subsidy. This would avoid undermining the security of benefits of members in well-funded schemes.

111. Many respondents who supported segregation of underfunded schemes believed that they should be earmarked so benefit reductions can be made to its members if they failed to meet the deficit as agreed. Those who opposed segregation expressed concerns about complexity and potential inefficiencies but also noted the benefit of identifying members.

112. There was a strong majority in favour of the consolidator only being available to closed schemes because of complexities associated with the inclusion of open schemes. A minority of respondents, such as investors, insurers and trustee groups, believed that open schemes should be accepted into the consolidator, if the priority is to maximise economies of scale and increase productive investment.

Proposed model: government response

113. The Government is continuing to explore how a consolidator which functions as a single pooled fund on a “run-on” basis rather than targeting insurance buyout might operate. The proposed model that is used for the consolidator should maximise economies of scale and open new investment opportunities, while improving governance standards to benefit members.

114. We are continuing to explore how schemes in scope would be able to access the consolidator providing that they can meet its terms and conditions. The intention would be to minimise any risk to the consolidator or the PPF compensation scheme and to guard against the moral hazard of employers not meeting their obligations to fund their schemes.

115. The consolidator would be accessible to private sector DB schemes which are closed to the future accrual of benefits. This approach would simplify the administration of the consolidator and enable it to focus on the segment of the market where the benefits are likely to be most impactful.

Member benefits

We asked:

Question 25: Will this achieve the right balance between limiting the cost of transactions while remaining reasonably attractive to scheme trustees and their members? Are there certain elements of schemes’ benefits that should always be retained?

Question 26: If standardised benefit structures are applied, what should these benefit structures be?

Question 27: What effect will this have on the existing market of commercial consolidators?

Respondents said:

The rationale of benefit standardisation was understood. The consolidator needs to be careful not to create ‘winners and losers’.

116. Most respondents understood that the rationale for benefit standardisation was administrative simplicity. Many respondents noted how this would benefit the administration of small schemes accessing the consolidator. Respondents mentioned that small schemes with unconventional benefit structures can be at a disadvantage when accessing commercial solutions so an administrative simplification may help to drive down costs.

117. Some respondents flagged that members may have sensitivity on matters concerning increases to their benefits. A respondent suggested inflationary increases to benefits (indexation) should be retained in the government consolidator.

118. Some respondents – including most insurers – shared their concerns on benefit standardisation. Some of these respondents flagged the complexities arising from benefit standardisation. There was significant concern that benefit standardisation could create scheme member ‘winners and losers’. A common concern was that trustees could face potential legal challenges from members if standardised benefits were perceived to be of lower value than the original scheme benefits.

119. An advantage of standardisation mentioned by respondents was that the consolidator would not be required to understand the detail of many different or complex benefit structures. Supportive feedback suggested that it could greatly simplify the administration of the consolidator thus reducing ongoing costs.

120. Conversely there were concerns about the significant cost of professional advice if benefit standardisation required an actuarial equivalence test. Respondents emphasised the importance of transparency in costings. Some respondents thought costs, including those for administering and standardising benefits, should be factored into transaction costs to help trustees and sponsors with their decision making.

121. There were significant concerns about market distortion if only the government consolidator can offer benefit standardisation, although the exact impact is dependent on eligibility and appetite for the consolidator. There was a suggestion across stakeholders, particularly made by advisory groups, that benefit standardisation services could be offered outside the government consolidator for schemes with complex benefit structures allowing insurers and commercial consolidators to compete with the government consolidator.

122. There was support for providing a range of benefits to cover the range that exists across schemes. Respondents suggested that the range of common benefit structures should be identified, and the consolidator’s structure must be comprehensive in its design to cover these. Across stakeholder groups, responses considered the use of the simplified ‘menu of benefits’ as proposed by the PPF. Suggestions were also made on using this as a starting point for the development of standardised benefit structures.

123. A respondent noted that many schemes and some insurers allow deferred members to transfer out and access pension freedoms after NPA (normal pension age) has been met and that the approach to this in the consolidator’s benefit structures should be considered.

124. There was some mention of how operating the consolidator at scale would require significant preparation for schemes due to standardising benefits and the onboarding process. Respondents believed this may affect the scale the consolidator can achieve in a particular timeframe.

125. Notable suggestions on benefit standardisation include focusing on standardising the more complex benefit structures that would otherwise be the most expensive and time-consuming to administer.

Member benefits: government response

126. We are conducting further work to determine the impact of this proposal to determine whether it is appropriate for schemes to standardise member benefits on entry into a pre-determined structure that all members of the consolidator will be under.

Governance

We asked:

Question 28: Will this proposed governance structure achieve effective administration and public confidence in the public sector consolidator?

Question 29: What alternative governance structures should be considered?

Respondents said:

The PPF is best placed to administer the government consolidator. Funds should be kept separate from PPF reserves used for other purposes.

127. In response to the proposal that the consolidator should be administered by the Board of the PPF (the ‘Board’), the majority of respondents believed that the consolidator should be ringfenced and legally separate from the PPF’s other funds.

128. Respondents in support of the Board administering the consolidator noted the Board’s successful administration of the PPF compensation scheme and the growing reserve. They felt that the Board would inspire confidence, and that the necessary administrative infrastructure was already in place.

129. Those with a contrary view, said that the consolidator should be administered by an independent board and a separate public body. Some concerns were raised about a potential or perceived conflict of interest if the Board administers the consolidator. Under the assumption that the consolidator would be a levy payer, several respondents did not believe that the Board should determine or collect the levy for its own scheme.

130. There were some comments on the alignment of requirements for the consolidator with those of master trusts and commercial superfunds. A respondent noted that DC benefits exist under some DB schemes and consideration must be given to whether these are included in the consolidator or managed elsewhere.

Governance: government response

131. As we further consider the consolidator, we propose that a consolidator would be administered by the Board of the PPF (the Board). The consolidator would be ring fenced and separate from other funds administered by the Board, although it might share common infrastructure.

132. A robust corporate governance structure already in place. The PPF is a public corporation sponsored by the Department for Work and Pensions. The Chair of the Board is accountable to Parliament through the Secretary of State for Work and Pensions. The Board operates within a corporate governance framework for public bodies established by Cabinet Office and overseen by the Department.

133. Expanding the PPF’s remit would extend the Board’s role and responsibilities. Further work will be taken forward with the PPF to determine what corporate governance changes would be needed to minimise the potential for perceived conflicts of interest and to ensure that members of schemes that transfer to the consolidator are fully protected.

Funding

We asked:

Question 30: Is the proposed funding basis appropriate to achieve the consolidator’s aims and in particular its aim to maintain the security of member benefits?

Question 31: Is the proposed entry price approach using the technical provisions basis feasible? What alternative entry pricing approach might appeal to the consolidator’s target market while still meeting the overall aims?

Question 32: How should any surplus generated by the consolidator be treated?

Respondents said:

Any surplus from the consolidator should be returned to the underwriters. Funding standards should be similar to those of commercial consolidators.  A sufficiently prudent entry price should be set to account for risks while maintaining affordability for schemes.

134. The majority of respondents agreed that funding standards should match those of commercial consolidators. Some respondents from pensions professionals and insurer groups suggested that the entry price should not be lower than it is for commercial consolidators to avoid unfair competition to the point of market distortion.

135. With the proposed range of gilts, respondents noted that this would likely be less than the price of insuring benefits. Some proposed that funding based on something stronger than gilts may be possible if there is no additional capital buffer available.

136. Some respondents suggested a weak funding basis with strict eligibility requirements, such as setting criteria that only allow entry for small schemes who are unable to receive a competitive quote from insurers.

137. Some suggested a dynamic structure of funding where the margin above gilts depends on market conditions and the scheme itself, with more prudence being taken in unfavourable conditions. A pensions professional group compared this to how insurers price and value their liabilities.

138. Most respondents agreed that the surplus should be returned to the underwriters who provide the capital buffer and hold the risk, similar to how surplus is returned in superfunds.

139. Some support was given to the option of the surplus staying in the consolidator to act as a buffer for additional security until benefits are sufficiently secured to assist with events that affect the financial position of the consolidator. Although, it was noted by respondents that conditions should be clearly defined when creating the consolidator and trustees should be made aware of and understand these conditions before their scheme joins.

140. Some respondents felt that there should be a balance between what happens when there is a deficit or surplus. If a deficit leads to member benefits being reduced, then they believe that it would be fair to enhance member benefits when there is a surplus as members are carrying some risk.

141. Returning the surplus to the employer was not viewed positively by those who referred to this option in their response. A trustee group and pensions scheme group were against this because the link with the employer is severed when a scheme enters the consolidator. Some pensions scheme groups mentioned that it would be appropriate to share with members of underfunded schemes until the deficit has been paid off and their link with the employer is ended.

142. Some respondents, including a trustee group, several investor groups and advisory groups, suggested using surplus to increase investments in UK productive assets, if the government/taxpayer are the underwriters, securing a long-term wealth fund for investment in the UK economy.

Funding: government response

143. A consolidator would need to be subject to a prudent funding standard. It would be required to value its liabilities, using prudent actuarial assumptions. The funding standard is likely to form the basis of the entry price for schemes transacting with the consolidator.

144. There are trade-offs between the level of prudence in the funding basis, the risk posed to the underwriter and the resulting entry price affordability for schemes. The more prudent the funding, the lower the risk to the underwriter but the higher the likely entry price. We will continue work with stakeholders to consider this issue and how we could ensure that the entry price would be set at a level that balances member security, affordability for schemes, and risk posed to the underwriter.

145. We are continuing to consider how surplus from a government consolidator would be used. This would be partly dependent on the level of underwriting on the consolidator.

Treatment of schemes with funding deficits or surplus funds

We asked:

Question 33: Are these arrangements for schemes transferring into the consolidator sufficient to achieve the consolidator aims outlined above? If not, what alternative arrangements would you propose?

Respondents said:

The rationale for inclusion of underfunded schemes in the consolidator was understood. Assurance must be given to ensure their inclusion does not compromise the funding of the consolidator.

146. Some respondents expressed concern about the risk that allowing underfunded schemes to enter the consolidator would pose. Where respondents were against their inclusion, the concern was the potential funding risk to the consolidator and the security of member benefits in well-funded schemes being put at risk if any proposed consolidator includes well-funded schemes. Others were supportive suggesting that the consolidator could offer an alternative solution as commercial providers would be unlikely to be available to underfunded schemes.  

147. Some potential issues that were highlighted were around separating members and the additional administration that would be required to track these members which could be a burdensome task and costly for the consolidator.

148. Other risks that were flagged were around the potential market distortion the inclusion of underfunded schemes could bring and the competitive advantage the consolidator may have over commercial solutions through being able to take in schemes with a deficit.

149. Respondents noted that it should be made clear how the relationship with the employer covenant would be severed and some spoke about how it is crucial to maintain a link to the employer for underfunded schemes to make payments. One actuary group questioned whether the current proposal would allow employers to sever the link with their scheme more easily than is currently possible. A significant number of respondents agreed with the proposal for securing benefits in the event of employer insolvency.

Treatment of schemes with funding deficits or surplus funds: government response

150. We are continuing to determine how a consolidator might be able to transact with underfunded schemes. This would need to be subject to the sponsoring employer entering an agreement with the consolidator to make good the funding deficit.

151. Under these arrangements, when an underfunded scheme transfers to the consolidator, the level of underfunding would be measured relative to the prudent entry price and a schedule of payments would be put in place to pay off the deficit. Also, in the event of employer insolvency before the payment schedule is complete, the consolidator would be able to reduce benefits. On an ongoing basis, once the employer has met the payment schedule, the link to the employer would be completely severed. The consolidator would then be fully responsible for its own funding level and the liabilities taken on.

152. At a minimum, the expectation is that the entry price would be at least as great as the scheme’s long-term funding objective, or the consolidator would become a “cheaper” funding target than schemes’ statutory funding objective and potentially introduce moral hazard opportunities.

Investment strategy

We asked:

Question 34: Is the proposed investment approach appropriate to achieve the consolidator’s aims as set out above?

Question 35: Will the proposed approach also allow the consolidator to reach a scale at which it can operate effectively?

Respondents said:

The funding and investment strategy for the consolidator should allow for investment in UK productive assets while maintaining a sufficient level of prudence.

153. Respondents mentioned that they needed further detail on the consolidator before providing full commentary on what has been proposed regarding investment strategy and scale.

154. Legal professionals highlighted how the consolidator would not be bound by the Solvency UK framework and would have greater investment flexibility which allows a broader range of illiquid assets. However, this respondent, as well as many others, cautioned that the funding basis should be prudent so as not to risk the capital buffer which could put member benefits at risk.

155. One employer group noted that the proposed arrangement regarding investment strategy would not exclusively benefit the UK’s economy. Trustees have a duty to make investments that give the best returns, which may be outside the UK.

156. Respondents highlighted that it would be difficult to achieve the aims of the consolidator if they were balancing both securing benefits for scheme members and investing in productive finance which will clash with each other due to the increased risk from investing. This was an opinion expressed by some trustee groups who noted that the priority for trustees are member interests rather than the UK economy.

157. Most respondents believed that the amount of underwriting and scale will influence the exact investment strategy of the consolidator. They also felt the scale that the consolidator will comfortably operate at will be determined by factors such as underwriting and eligibility criteria rather than investment strategy.

158. Consultancies and insurers were amongst respondents who noted that if the consolidator were to focus on its aim to increase UK productive finance assets, then including more than small schemes but also those desirable to insurers would help to increase scale.

159. Various trustee and consultant groups believed that sponsors and trustees need to be convinced that this approach is the most appropriate for its members and this is crucial to reaching scale.

Investment strategy: government response

160. The government proposes that the consolidator’s assets across all transferred schemes would be pooled and invested on a basis that provides a high level of benefit in its investment returns while maintaining security for member’s benefits. The security of member benefits remains a primary concern for the government when setting an investment strategy.

161. The Board of the PPF has considerable investment expertise and delegates investment management to an investment committee. The government would maintain the current regulatory framework but, additionally, would require the Board to follow additional considerations, with the underlying principle to maintain the consolidator’s long term financial viability and to take account of the interest of members.

Underwriting

We asked:

Question 36: What method of underwriting would be most appropriate to achieve the aims of the consolidator, given the expected capital requirements and timescales?

Question 37: Are there other options that the government should consider to provide underwriting for the consolidator?

Question 38: Should government underwrite the consolidator and set the investment strategy?

Question 39: How could any government underwriting be structured to support the aims of the consolidator while limiting risks to the taxpayer?

Question 40: What conditions ought to be met for the PPF reserves to be considered as a source of underwriting?

Respondents said:

The use of PPF reserves to underwrite the consolidator should bring caution not to cause a conflict of interest. It may be an option to use PPF reserves in the form of a recoverable loan.

162. In response to the options for underwriting the consolidator, most respondents did not agree with PPF reserves being used. There was caution about the risk to pension protection and the potential for reputational damage. An investor group spoke about how it would be unfair to PPF levy payers if reserves, which the levy is paid into, are used to pay member benefits for schemes in the consolidator. Respondents also referred to the potential conflict of interest.

163. Some respondents felt that strict eligibility requirements for entering the consolidator would help justify the use of government underwriting by limiting the risk on taxpayers.

164. Many respondents did not suggest any other options for underwriting the consolidator. A small number thought that government underwriting could be possible but in a limited capacity. These respondents suggested that it could be achieved either through restricting the size of the consolidator or the amount of underwriting itself so as not to cause market distortion.

165. Investment from the private sector and the capital buffer being supported entirely by the employer were common suggestions from the minority who suggested other options for underwriting. There were concerns about using private investment and the effect this may have on the government’s ability to provide assurance and security.

166. Regarding the approach to government underwriting, some respondents requested details on investment return and other plans for the consolidator before commenting on whether they believed the consolidator could reach a scale at which it can operate effectively.

167. Some respondents believed that an approach should be taken similar to superfunds to prevent market distortion, and that there should not be any unfair advantage to the consolidator.

168. There was no consensus on whether the government should underwrite and set the investment strategy for the consolidator. Although in many responses, views on underwriting and setting investment strategy were linked. Some respondents believed that the government should set the investment strategy if it completely underwrites the consolidator. Others did not believe the government has the investment expertise for this.

169. Respondents from consultancies and the asset management sector frequently held the view that the government should influence the investment strategy of the consolidator. For those who did not believe this, the majority were concerned about political influence and suggested that it should be determined independently.

170. Some insurers were against the use of public money for underwriting the consolidator, especially if the intention is enabling underfunded schemes to transact. Some concern was expressed around whether additional funding would be provided for underwriting the consolidator if it failed or whether it would fall into the PPF.

171. Conversely, there was some discussion about the potential use of PPF reserves if the fund continues to grow. Other respondents spoke about PPF reserves being used in the form of a loan and suggested ways this could be recovered while benefiting the consolidator.

Underwriting: government response

172. There are a range of interconnected issues such as underwriting, the funding standard and entry price that cannot be set independently and which can only be properly determined once key considerations including eligibility criteria have been established.

173. The potential scope and scale of the consolidator would be dependent on eligibility criteria and the amount of underwriting capital available. The government is still considering options for the approach to underwriting and the structure of the underwriting.

Model for a Public Consolidator: government response

174. Following careful consideration, the government is continuing to explore the establishment of the consolidator. From consultation feedback and general engagement, we understand there are several key policy considerations to explore before proceeding with a consolidator.

Chapter 5: Potential take-up and impacts

175. This chapter covered additional questions, for DB schemes and those who oversee DB schemes such as consultancies, concerning scheme views and interest on the proposals for scheme surplus and the consolidator. We sought scheme-specific information such as its size and the number of members. Additionally, we consulted on scheme interest in surplus sharing, an opt-in 100% PPF underpin and on the proposed model for a consolidator.

176. On scheme interest for an opt-in 100% underpin and surplus sharing proposals, the consultation asked whether DB schemes have previously had their surplus extracted and the purpose for surplus extraction. In addition, we consulted on whether the scheme would be more or less likely to extract a surplus based on the proposals in this consultation.

177. On scheme interest for the government consolidator, the consultation asked whether the schemes would join the consolidator based on the proposals set out in this consultation and asked for projected cost savings. It also sought information on any buyout challenges experienced by schemes. Schemes also had the opportunity to flag any additional concerns on the impact of a consolidator on the insurance or superfund market.

General scheme information

We asked:

Question 41: Can you provide an overview of the size of your scheme (assets, liabilities (preferably on a buyout basis), and number of members)?

Respondents said:

178. Respondents ranged from very small schemes (£1 million assets under management) to very large schemes (£1 billion plus). Many reported their schemes or the schemes they advise having a surplus on a buyout basis.

179. The number of members either reported in one scheme or ranging across a portfolio of schemes, overseen by groups like consultancies, ranged from the 100s, with most having 10,000s to 100,000s. One trustee group declared covering hundreds of pension schemes with a total member count over 3 million.

Scheme interest (treatment of scheme surplus and 100% underpin)

We asked:

Question 42: Has your scheme previously had a surplus extracted? Was this accessed for a specific purpose?

Question 43: To what extent do you think your scheme would extract a surplus under the changes discussed in this consultation?

Question 44: Would your scheme be likely to change investment strategies as a result of being able to access a surplus easier? To what extent would this be dependent on the PPF 100% underpin?

Question 45: As outlined in the consultation, the PPF previously conducted analysis suggesting a super levy of 0.6% of liabilities would be required to support a 100% PPF underpin. Do you consider this an appropriate cost? Is there a particular point which would make this more or less attractive to your scheme?

Respondents said:

180. Most respondents did not respond to or disclose whether their scheme had previously had a surplus extracted. For the minority of respondents who did respond to these questions, they disclosed that they had not extracted surplus.

181. For those who extracted their scheme surplus, some mentioned how scheme surplus was used to allow the employer covenant to meet the cost of contribution holidays. A respondent who had previously done this viewed it as a legitimate use of the scheme surplus for business reasons. A trustee group used the surplus for reducing the contributions required to meet the accrual of active members with the scheme at a strong funding level and as part of the actuarial valuation process in negotiations between the trustees and employer.

182. Other respondents mentioned where it had been used for benefit augmentation for deferred and pensioner members. Some respondents believed that actions like contribution holidays and benefit augmentation for members should be prioritised over returning a surplus to employers.

183. A considerable number of respondents, including many trustees, felt that their scheme or their client’s scheme would be likely to extract a surplus following a change in conditions for surplus sharing as discussed in the consultation, if their scheme’s position would allow them to.

184. Some respondents felt surplus sharing could incentivise sponsors to run-on with their pensions schemes while providing a reasonable level of security for member benefits. Additionally, many respondents supportive of the proposed changes to surplus sharing noted it would help improve scheme outcomes and support the wider UK economy though long-term investment strategies.

185. Some respondents spoke about how they would engage in discussions on what to consider when approaching surplus sharing. One trustee group spoke about the potential for one-off lump sums amongst other suggestions. Another trustee group were interested in the option of moving surplus between schemes or sharing it with the employer.

186. Some respondents gave neutral responses around whether their scheme would be likely to extract surplus. A low funding position in their scheme was often a reason they would not consider this.

187. A pensions professional group flagged that a scheme’s funding position may deteriorate because of surplus extraction so any framework should consider that.

188. A notable number of respondents thought that their investment strategies (or those of the clients), could change because of the proposals to surplus sharing. A consultancy reported that they would change their investment strategy as they could afford to increase the risk in moderation if it was easier to access scheme surplus. A trustee group thought that it would change the way in which assets are no longer treated as “deadlocked” in the scheme and members could be provided with additional benefits from investment returns.

189. Many did not believe it was likely that their schemes would change their investment strategies. Some highlighted how the objective of their scheme is to pay pensions rather than being a venture for an employer to invest and bring in additional income.

190. Those who mentioned the 100% underpin did not believe that it would make much difference to the likelihood of changing investment strategies. For those who disagreed, believing a 100% underpin could affect investment strategies, most did not support the implementation of a 100% underpin.

191. A significant number of respondents did not support the super levy quoted at 0.6% of liabilities to support the 100% underpin cost. They did not believe this to be appropriate, believing it to be prohibitively expensive. These respondents were concerned it would only be well-funded schemes with a strong employer covenant that could meet this cost or that only schemes with weak sponsors would be attracted to it. Some respondents proposed alternatively that if a super levy was introduced, the cost should be calculated on a scheme specific basis depending on investment strategy and funding. However, despite the alternative suggestions, many respondents did not think that the cost of a super levy and/or use of PPF reserves for an opt-in 100% underpin would be justified.

192. The moral hazard risk of the 100% underpin was frequently mentioned by unsupportive respondents who flagged that this could cause imprudent decisions to be made by schemes knowing that they will benefit from complete protection.

Scheme interest (public sector consolidator model)

We asked:

Question 46: To what extent would your scheme be interested in entering a public sector consolidator as outlined in the consultation?

Question 47: Has your scheme faced any challenges in trying to buyout with an insurer?

Question 48: Were you to take part in the public sector consolidator, what would be the estimated savings of entering a public sector consolidator? Do you envisage any costs and if so, can you provide an estimate of what the costs are likely to be?

Question 49: Do you have any wider concerns about the impact a public sector consolidator could have on the insurance or superfund market?

Respondents said:

193. Many respondents did not respond to whether they see schemes being interested in the government consolidator. Of those who responded, many stated that their scheme or those they work with are not included in the scope of the consolidator and based on the information available, are unlikely to be targeted.

194. Advisory groups were among respondents who perceived the schemes they work with being interested in the government consolidator. Some reasons for the appeal of the consolidator to schemes included its flexibility, perceived government backing of the scheme whether explicit or not, and the consolidator’s ability to be a potential solution for those unable to access commercial solutions at a reasonable price.

195. Some consultancies noted the struggle for schemes to receive quotes with there being a few providers and pricing being expensive and providers demanding exclusivity as well as the time taken for buyout. The lack of capacity for the market to process buyouts were mentioned as a contributing factor.

196. Some respondents stated that they are not aware of challenges regarding smaller schemes struggling to buyout with an insurer. Respondents including consultancies dismissed the challenges schemes faced as being down to whether it is an appropriate time for the scheme to seek buyout or whether time is needed for data to be sorted or for the scheme to reach a stronger funding position for buyout. It was noted that data quality can be poor amongst some schemes and there may be complex benefits or illiquid assets in schemes.

197. One employer group flagged ‘all risks’ cover which are provided by insurers as a challenge they have faced. They noted that it does not necessarily mean in its application that all risks are covered by the insurers.

198. A significant number of respondents have reported their scheme or schemes they work with not pursuing buyout or having any plans to do this at the time of their response or that they have pursued it and not faced any challenges.

199. Many did not provide a response on the estimated saving of entering the proposed government consolidator. Some simply stated they had not made an assessment on this.

200. Several respondents spoke about the costs and time associated with the data cleanse required to prepare schemes for standardisation as part of onboarding into the government consolidator. They foresaw the costs for this and expert advice for actuarial equivalence calculations being expensive, especially for small schemes. Some respondents flagged the risk of legal challenge against standardisation of benefits from members which could be costly.

201. A trustee group reported a potential saving of £50,000 on at least some of the professional fees which the employer usually faces. Another spoke about the running costs and time spent on DB pensions being the area where savings would occur. Similarly, a pensions group spoke about the cost savings for schemes and employers deriving from the simplicity of having standardised structures to administer.

202. Some wider concerns on the potential impacts of the government consolidator on insurers and the superfund market were around which schemes can access the consolidator, with some respondents being against schemes in deficit accessing the consolidator.

203. Another common concern was regarding benefit standardisation being exclusive to the government consolidator. Respondents expressing this concern believed in a level-playing field where other consolidators such as master trusts and insurers can also standardise benefits.

204. A frequent view was that the government consolidator should not have a competitive advantage or affect the growth and success of the superfund market especially if it has a wide scope for entry, competitive price or additional security. Additionally, some suggested the nature of the government consolidator as a taxpayer or government-backed scheme may give it a competitive advantage, making it more attractive than a commercial consolidator.

205. Some respondents had concerns about severing the employer link and the terminal nature of entering the consolidator on reopening a consolidated scheme to members and utilising its surplus. There were concerns around investments in productive assets being disrupted due to this.

206. There were other legal and actuarial concerns around benefit standardisation that some respondents emphasised the need to address. The importance of regulating the consolidator was also emphasised in some responses.

Potential take-up and impacts: government response

207. We are grateful for the valuable contributions from stakeholders in response to this chapter of the consultation, which gathered scheme-specific information.

Chapter 6: Next steps, business burdens and regulatory impacts

Government response: impact assessment

208. DB Surplus flexibilities will be taken forward via the Pension Schemes Bill (set to be introduced later in 2025). As part of this, a full impact assessment on the potential costs and benefits to business will be produced and published.

209. As outlined previously, further work will be undertaken to better understand the costs and benefits of a government consolidator, taking into account the views and perspectives received from the consultation and gathering further evidence and insights to understand the implications on DB schemes, employers, and the insurance market.

Annex A: List of respondents

Scheme Member 1
Scheme Member 2
Scheme Member 3
Scheme Member 4
Scheme Member 5
Consultancy 1
Consultancy 2
Consultancy 3
Trustee Group 1
Individual Trustee 1
Individual Trustee 2
Individual Trustee 3
Employer Group 1
Employer Group 2
Insurer 1
Trade Union 1
Streamline Pension Fund
TPT Solutions
Herbert Group
Deprived Pensioners Association DPA
Nationwide Pension Fund
Pension Ombudsman
Pegasus
Society of Pension Professionals
Aptia UK
Slaughter and May
Punter Southall
Legal and General
Royal Society for arts
Universities Superannuation Scheme
Pensions Management Institute
Lloyd’s Register Pensioners Action Group
The Co-Operative Group
Winterbourne
Squire Patton Boggs
XPS Pensions Group
DB Trustee Services Limited
Chubb Pension Plan
BP Pensioners Group
Lane Clark & Peacock LLP
Deutsche Bank
IFM investors
Shell Pensions Group
Zedra
UNISON
Association of professional Pension Trustees APPT
Association of Consulting Actuaries
ABI
C-Suite Pension Strategies
Institute of Chartered Accountants of Scotland ICAS
Sackers
100 Group
Columbia Threadneedle Investments
CMS Cameron McKenna Nabarro Olswang LLP
BAE Systems
PPF
Railways Pension Trustee Company Limited RPTCL
APL
BC Partnership Limited
PwC
CBI
ICL Pension Trust Limited
Buck, A Gallagher Company
Aon
PLSA
Investment Association
Clara
Church of England Pension Board
Mercer
Association of Real Estate Fund
PIC
EY
Zurich Financial Services UK Pension Scheme
British Airways Pensions (Airways Pension Scheme)
British Airways Pensions (New Airways Pension Scheme)
GHG Services Limited
Barnett Waddingham
Hyman Robertson
Just Group
ICAEW
Brightwell
ECPA
Broadstone
Unite
Astra Zeneca
Burges Salmon
Dalriada Trustees
Van Lanschot Kempen Investment Management
Insight Investment
Cardano
Royal London
Make UK
Aviva Staff Pension Trustee Limited
Abrdn
Financial Services Consumer Panel
Atkin Pensions
Independent Governance Group (IGG)
Shoosmiths
3M Pension and Life Assurance Scheme
Conleth O’Neill
Phoenix Group
Simmons and Simmons
Institute and Faculty of Actuaries (IFoA)
Canada Life UK
CNH and JI Case Pension Schemes
Capita
Schroders
WTW
Eversheds Sutherland
BlackRock
Vidett
Arc Pensions Law
Greycross Partners
BT Group
RMT
Family Business UK
First Actuarial LLP

1. Defined benefit trust-based pension schemes research: Report of findings from the 2024 survey ↩ ↩²

2. Pension risk transfer report 2024 ↩

3. Pensions Risk Transfer Quarterly Insights: April 2025   ↩

4. Risk Transfer Report 2025 ↩