Publications

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Deficits, rather than surpluses, are at the forefront of most trustees' and employers' minds but nevertheless now is the time to be thinking about preserving for the future any power in the scheme rules to return surplus to the employer.

And arguably, steps may also need to be taken to preserve powers to make any payment to employers under the scheme rules, not just a return of surplus.

The resolution to achieve this has to be passed before 6 April 2011, and with a three month notice requirement to satisfy this means getting the ball rolling sooner rather than later.

Why has this issue arisen?

The relevant provision in the Pensions Act 2004 (section 251) applies to schemes where, just before the Act came into force five years earlier:

• there was a power under the scheme to make payments to the employer
• the scheme was one to which the statutory basis for eliminating surplus from an on-going scheme applied (this applied to most schemes and was a requirement under the pre-2006 tax regime), and
• the scheme was not winding-up.

This will apply to most defined benefit schemes not in winding up. Section 251 provides that no payments to the employer may be made out of scheme funds except by virtue of a resolution of the trustees. The power to pass the resolution can be exercised only once and cannot be exercised after 6 April 2011, with the result that any power to repay funds to the employer could be lost from that date if employers and trustees take no action.

Does this apply only to payments of surplus?

The intention of the legislation seems to have been for this restriction to apply only to the payment of surplus assets to an employer where the scheme is ongoing. However, the actual drafting is much broader and refers to "any payment" to the employer. Consequently, a cautious approach would be to draft the resolution in such a way as to preserve not only the power to distribute surplus in an ongoing scheme but also any other powers to make payments to the employer (for example in cases of lien or forfeiture or payment of expenses).

What should employers and trustees be doing?

Employers should look at their rules and consider whether there are powers there which need to be preserved. If so, they should be asking trustees to consider passing the necessary resolution.

Trustees then need to consider whether they should pass that resolution, which they may only do if they are satisfied that it is in the interests of members. It should not be difficult for trustees to be satisfied that the resolution is in the interest of the members. The passing of the resolution could alleviate employer concerns about the possibility of recovering any over-funding, making employers more amenable to making greater payments under recovery plans.

Trustees should also note that the passing of the resolution in no way commits them to the distribution of any future surplus to the employer. It simply preserves the existing power which the trustees could decide to exercise, or not, in future if it becomes relevant (i.e. the scheme is over-funded on the buy out basis and all of the other statutory requirements are met). In relation to other payments to employers (lien, expenses etc) the resolution would simply preserve the normal operational provisions of the scheme which might otherwise fall away next April.

Section 251 also allows trustees to resolve that the power is exercisable in such circumstances and subject to such conditions as may be specified, so trustees also need to consider the terms on which any resolution is made. Employers will, of course, take a keen interest in those terms.

Member communications

Notice of the trustees' intention to pass a resolution under section 251 must be issued to members and to the employer. This notice has to be issued at least three months before the effective date of the resolution. Resolutions must be made before 6 April 2011 so in effect the last possible date for notification to members is 5 January 2011. In practice, this means that decisions need to be made and, if required, resolutions and communications drafted before Christmas.

Of course, all this could change again…

Steve Webb, Minister for Pensions, has indicated in an interview with the pensions press that he would consider changing the requirement for trustees to have to pass a resolution before April 2011 to preserve the power to refund surplus. We will keep you informed of further developments but in light of timescales under the legislation as it currently stands, employers and trustees may have to start the ball rolling if only to stop it again later.