HL UK Pensions Law Digest 12 June 2026

Welcome to our latest update, in which we cover: 

Release of surplus: draft regulations

• The DWP’s long-awaited regulations, with detailed requirements for the release of surplus to employers;

Transfers: amendments to the transfer conditions regulations

• Draft regulations intended to resolve issues with the current transfer protection requirements;

Conversion of guaranteed minimum pensions (GMPs): annual allowance

• Draft legislation intended to avoid unexpected annual allowance charges;

VAT on pension scheme expenses: updated HMRC guidance

• We will report further on HMRC’s updated position in a future Digest.

Payment of surplus to employers: draft regulations

The DWP has issued long-awaited draft regulations setting out more detailed requirements for allowing the release of surplus under new powers introduced by the Pension Schemes Act 2026. Consultation closes on 2 September 2026.

As a reminder, changes made by the 2026 Act will enable trustees to amend scheme rules to pay surplus to an employer from an ongoing scheme, even where this would not be allowed under the scheme rules. The new provisions do not apply to schemes in winding up.

Alongside the draft regulations, the Pensions Regulator (TPR) has issued a statement on the new surplus flexibilities, aimed at supporting discussions between trustees and employers on options for releasing surplus.

For details of the proposed new requirements, please see our briefing note.

Return to Contents.

Transfers: amendments to transfer protection requirements

The DWP has issued a consultation paper and draft regulations, intended to address concerns with the current legislative transfer regime while retaining appropriate protections against fraud. The consultation ends on 21 July 2026.

The DWP explains that the consultation is the first stage in a wider programme to address pension scams and pension transfers. Later this year, the DWP intends to explore how transfer processes may be modernised, and savers enabled to make well informed decisions.

The DWP has also issued an Options Assessment, which identifies transfers to smaller schemes, in particular small self-administered schemes (SSASs), as an emerging risk and explains the DWP's targeted response.

As a reminder, under the Conditions for Transfers Regulations 2021, trustees may only make a statutory transfer of an individual's rights in a pension scheme if the trustees decide that either the First Condition or the Second Condition (please see below) are satisfied.  

First Condition

The First Condition is met if the transferring trustees are satisfied beyond reasonable doubt that the receiving scheme is:

• A public service scheme;
• An authorised Master Trust; or
• An authorised collective money purchase (CDC) scheme.

Under the draft regulations, the First Condition will also be met if the transferring trustees are satisfied “on the balance of probabilities” that the receiving scheme is a “reputable scheme”.

The consultation paper explains that the regulations are expected to include a non-exhaustive list of factors which trustees may consider when assessing whether a proposed receiving scheme is reputable. These factors are likely to include:

• Whether an existing relationship exists with the transferring scheme;
• The risk profile and nature of investments in the receiving scheme;
• Any regulatory concerns or earlier warning flags; and
• Transparency around fees and charges.

Second Condition: reminder

The Second Condition is met where there are no “red flags” present in relation to the transfer.

Where an “amber flag” is present, the transfer may only proceed if the member takes specified guidance from the Money and Pensions Service (MaPS).

It’s a red flag if the member fails to supply evidence of taking MaPS guidance if required to do so.

Second Condition: employment link

Currently, a red flag exists if the member fails to demonstrate an employment link with the receiving scheme.

Under the amendment regulations, there will also be a red flag if the member provides all the evidence required by the transferring trustees to demonstrate an employment link, but the evidence does not demonstrate such a link.

The DWP explains that this amendment will implement its proposal to introduce a new red flag where a transfer to a SSAS is proposed but the member cannot demonstrate a verifiable employment link with the SSAS.

(We note that the new red flag will apply on a transfer to an occupational scheme of any size where the member does not evidence an employment link, unless the receiving scheme falls within the First Condition.)

Second Condition: requirement to take specified guidance

The requirement to take specified guidance will be removed where the member proves they have already taken specified guidance in the previous 12 months (which may happen if, for example, the member is consolidating more than one pension pot at the same time).

Second Condition: overseas investments amber flag

The presence of overseas investments in the receiving scheme will no longer be an amber flag.

The consultation paper recognises that many legitimate schemes hold overseas investments. It notes that holding high risk or unregulated investments, or unclear, complex or unorthodox investments are amber flags under separate provisions, and considers that these provisions provide sufficient protection to transferring members.

Second Condition: incentives red flag

The DWP has rejected calls to remove the red flag which applies where the member has been offered an incentive to transfer. While recognising that incentives may be used legitimately in some parts of the market, it considers that the red flag remains an important and effective indicator of scams.

The DWP points out that if transferring schemes are satisfied that the receiving scheme is a “reputable scheme”, the transfer may proceed under the First Condition, without having to consider the red/amber flags under Condition Two.

Return to Contents.

Conversion of guaranteed minimum pensions: annual allowance

HMRC has issued a draft Order for consultation to address concerns that conversion of guaranteed minimum pensions (GMPs) can inadvertently cause deferred members to lose the protection of the deferred member carve-out (DMCO) and face unexpected annual allowance charges. GMP conversion is commonly used alongside exercises to equalise benefits between men and women.

The Order provides for the value of converted rights to be disregarded for annual allowance purposes where the rights are attributable to GMP conversion or to rectifying sex inequality.

The amendments will apply to defined benefit (DB) and cash balance arrangements and will have effect from 6 April 2027.

Consultation closes on 13 July 2026.

Return to Contents.

VAT on pension schemes expenses

HMRC has updated its guidance on the recovery by employers of VAT on pension scheme expenses.

The guidance is complex. We are analysing its impact and will include more detail in a future Digest.

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Authored by Jill Clucas.