Section 251 of the Pensions Act 2004 provides that trustees of UK pension schemes will not be able to use certain powers to make payments of surplus to employers in future unless the trustees pass a resolution no later than 6 April 2016.
What is the issue and what is the deadline?
Section 251 of the Pensions Act 2004 provides that trustees of UK pension schemes will not be able to use certain powers that they have under the scheme rules to make payments of surplus to employers in future unless the trustees pass a resolution preserving the power no later than 6 April 2016.
The trustees are required to give three months’ notice to the members and the employers before passing any such resolution, so those notices would need to be given by the end of 2015 if a resolution is sought. Employers therefore only have a short time remaining to:
- assess whether a resolution is needed; and
- seek agreement from the trustees to passing the resolution,
in time for notices to be sent.
What power would be lost?
The key power that would be lost is any power in the scheme rules to refund surplus to an employer whilst a scheme is on-going (i.e. before it is wound up).
Why might taking action be important?
In these times of funding deficits, employers may consider a power to extract surplus to be an entirely theoretical issue. This is particularly the case when coupled with the fact that extracting surplus from an ongoing scheme is subject to additional onerous legislative requirements.
However, it is worth bearing in mind that:
- The ability to preserve these powers is a “now or never” option, with a short term deadline. Once the power is lost, it is lost for good.
- Losing the power may impact on the employer’s willingness to fund the scheme towards secondary funding targets (which are likely to be a trustee focus).
- There may be immediate and lasting accounting consequences of losing these powers under International Accounting Standard (IAS) 19 if no action is taken – particularly if there is no ability to extract surplus in a winding up situation.
What action is needed?
- Consider whether the scheme rules contain any powers which are affected by section 251.
- Consider whether it is important to them that these powers be maintained (eg for accounting reasons).
- Check whether any resolution has already been passed by the trustees and whether its terms remain appropriate.
- If necessary, engage with the trustees as soon as possible to seek agreement on a resolution in time for notices to be sent to members.
Why would the trustees agree?
Section 251 does not compel the trustees to pass a resolution, so it is for the employer to persuade the trustees to do so. The trustees must be satisfied that passing this resolution would be in the scheme members’ interests.
This could be because:
- There may be adverse consequences for the employer (which would in turn impact on the covenant supporting the scheme) if, for example, failing to pass a resolution would lead to adverse accounting consequences.
- Loss of the power could result in employers becoming less inclined to fund their pension schemes (for example, towards secondary funding targets), if that increases the risk of overfunding.