Repayment of pension surplus: Act now or forever hold your peace

Employers and trustees of defined benefit pension schemes must take action if they wish to retain the ability to repay surplus funds to the employer. If steps are not taken now, any such power will be permanently lost from 6 April 2016.

6 November 2015

6 April 2016 will be a significant date for defined benefit pension schemes, with much fanfare surrounding the abolition of DB contracting-out. However, this date is also important for another, lesser-known reason: it is the date on which any power to repay ongoing surplus funds to an employer will be lost, unless the trustees have taken steps to preserve it.

Section 251 of the Pensions Act 2004 requires trustees to pass a resolution, prior to 6 April 2016, to retain any current power to pay surplus to an employer whilst a scheme is ongoing.  (No resolution is required in respect of a power to pay a surplus on winding up.) Three months’ prior notice must be given to scheme members, so the deadline for taking action is 5 January 2016.

What do trustees and employers need to do?
Many schemes will have dealt with this issue when the legislation first came into force, but for those which have not, we recommend taking the following steps as soon as possible:

  • Check scheme rules for an existing power to pay a surplus to the employer while the scheme is ongoing. If there is none, no further action is required.
  • Where there is a power, the employer should consider whether it wants to ask the trustees to preserve the power by passing a resolution.
  • The trustees should consider the employer’s request and, provided they are comfortable it would be in the best interests of scheme members, agree to exercise their power to pass a resolution under section 251.
  • Three months’ written notice must be given to the employer and to all scheme members.
  • The resolution must be signed before 6 April 2016.

Is it in the interests of scheme members?
Some trustees may wonder why they should agree to pass a resolution. Surely it would always be in members’ interests for any surplus to be used to increase their benefits, not to go back into the employer’s coffers? While this is something for each trustee board to consider carefully in light of their own scheme’s circumstances, there are a few good reasons why a resolution may in fact be in members’ interests after all:

  • The scheme was set up by the employer with this power in the rules, so the position of the members is not being worsened.
  • The fear of “trapped surplus” might restrict the amount the employer is prepared to contribute to the scheme in the future.
  • There are statutory safeguards in place to ensure that any future repayment of surplus must be in scheme members’ interests based on the circumstances at the time.

The issue of what to do when a scheme is in surplus is unlikely to be top of the agenda for trustees and employers of most final salary schemes. Many are dealing with significant deficits, and the thought of generating surplus funds may be a distant dream. However, running a pension scheme requires long-term thinking, and it is important for trustees and employers to act now if they want to avoid issues further down the line.