Surplus Refunds: Trustee action required to preserve ongoing surplus powers

Posted by Rupert Graham-Evans on
Many UK registered defined benefit pension schemes ("DB Schemes") contain powers allowing trustees to make payments to employers where the fund is in surplus and the scheme is ongoing.

The pre-6 April 2006 pensions tax regime required ongoing DB Schemes to take action to reduce any actuarial funding surplus to a specified limit. Payments of surplus to an employer were possible where these were allowed by the provisions of the scheme and made in accordance with section 37 of the Pensions Act 1995.

After 6 April 2006 there were changes made to the law in this area:

  • The requirement to reduce surpluses was repealed by the Finance Act 2004;
  • The Pensions Act 2004 introduced changes to section 37 of the Pensions Act 1995; and
  • Section 251 of the Pensions Act 2004 allowed DB Schemes with pre-existing surplus powers in their rules to keep these powers provided a Trustee Resolution was passed before 6 April 2011.

The Government clarified some uncertainties over the application of section 251 by way of amendments under the Pensions Act 2011. The current position is:

  • Section 251 only applies to ongoing surplus powers (rather than the distribution of surplus on a wind-up);
  • The deadline for passing a Trustee Resolution to retain surplus powers was extended to 6 April 2016;
  • Trustees can revisit any Trustee Resolutions passed before the initial deadline of 6 April 2011.

The process

Trustees need to act quickly to consider these important issues as time is running out to pass the resolution before 6 April 2016.

Before the Trustee Resolution can be passed:

  • Trustees need to send appropriate written notifications to members and the employers specifying their decision to retain these ongoing surplus powers;
  • Such notifications must be issued at least three months before the effective date of the Trustee Resolution;
  • This means the latest date the notices can be give is 5 January 2016.

The pros and cons of retaining surplus powers

Where trustees take action to preserve ongoing surplus powers they should note that the surplus must be on a full buy-out funding basis rather than a scheme specific funding basis, an accounting basis or a PPF basis of funding.

Trustees have to satisfy themselves that resolving to retain surplus powers is in the best interests of members and should consider their duties carefully.

Reasons to decline to keep surplus powers:

  • Schemes may be unlikely to reach this high level of funding outside of a formal buy-out process which will involve the wind-up of the scheme anyway;
  • Anticipated difficulties with member communications

Reasons to retaining surplus powers:

  • Increase motivation for employers to fund DB Schemes, particularly where the scheme is close to buy-out funding levels;
  • Resolving to keep ongoing surplus powers will allow employers to recognise a funding surplus as an asset on their balance sheet under IAS 19 (the international Accounting standard). A decision not to preserve surplus powers may adversely affect an employer's balance sheet.

About the Author

Rupert is a Legal Director in our Pensions team based in our Southampton office.

Rupert Graham-Evans
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023 8085 7240

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