For trustees and employers up and down the country an obscure piece of pensions legislation caused quite a stir during the course of 2010, despite the fact that it had been in force since April 2006. The culprit - Section 251 of the Pensions Act 2004. For schemes whose rules contain powers allowing a refund of surplus to its sponsoring employers the provisions of this section were hotly debated throughout the pensions world. In broad terms, problems with the drafting of the legislation lead to confusion as to the scope of the new statutory provision. However, clarity arrived in the form of the Pensions Bill 2011 (issued on 13 January 2011). The Bill appears to address these drafting problems and to also extend the transitional period for trustee action from 6 April 2011 to 6 April 2016.

In more detail:

Section 251 requirements

For the vast majority of schemes, the trustees' ability to repay a scheme surplus to a sponsoring employer is currently a largely irrelevant consideration because, generally speaking, most schemes are still in deficit. However, if the power to return surplus to the employer existed in a scheme's documentation prior to A-Day (6 April 2006) Section 251 needs to be complied with.

In order to retain such powers trustees were required to pass a resolution essentially reconfirming the power before 6 April 2011, after sending out notices to members (at least three months before the resolution was passed). If this is not done, legislation will override the scheme rules and prohibit any surplus repayments to employers at any time in the future.

Section 251 does not compel trustees to pass a resolution. To pass a Section 251 resolution preserving the power to repay surplus, the trustees must be satisfied that preservation of the power is in the interests of members of the scheme. Whilst it could be questioned how this could ever be in members' interests trustees can take comfort from the fact that employers may agree to more generous scheme funding objectives, or more prudent assumptions in the knowledge that where investments perform better than expected and extra funds are generated, these may be accessed by the employer.

Which schemes are affected?

It was widely considered that Section 251 applies to ongoing schemes which contained a power to make refunds of surplus to the employer. However, it seems the provision could also apply to schemes on wind-up where an employer may well be expecting a payday of returned overfunding.

In fact, the provision was also considered to be wide enough to prohibit any payment (not just surplus) from a scheme to an employer, unless the trustees pass a resolution to allow it.

Pensions Bill 2011 - problem solved?

Once enacted, the Pensions Bill 2011 will restrict the application of Section 251 to payments of surplus from ongoing schemes only and will not apply to other payments such as routine employer administration payments. This should make member notices and trustee resolutions easier to draft. The Bill will also extend the transitional period for action from 6 April 2011 to 6 April 2016 thereby providing trustees with more time in which to comply. Our advice is not to wait another five years to comply and where trustees have already given notice to members they should press ahead as planned and pass the resolution on expiry of the three month period.