Refunds of surplus may seem hypothetical in current times, especially as surplus for refund purposes is measured by reference to a “buy-out” funding level. But there is an impending deadline (6 April 2011) which may be significant in future years if a scheme finds itself in the fortunate position of having such a surplus.
s251 is a hitherto little noticed provision in the Pensions Act 2004 which potentially prevents any future payment of surplus to an employer except where a trustee resolution has been passed by 6 April 2011. The resolution would not authorise the immediate repayment of surplus, it would only authorise the refund power to continue.
Trustees must satisfy themselves that it would be in the interests of the members to pass a resolution under s251. It may be thought to be in members’ interests if the fear of “trapped surplus” is a brake on employer contributions. The Pensions Regulator has stated that “employers may agree to higher scheme funding objectives, or more prudent assumptions, in the knowledge that where investments perform better than expected and extra funds are generated, they may be accessed by the employer”. (See http://www.thepensionsregulator.gov.uk/guidance/guidance-scheme-funding-faqs.aspx).
Trustees may already have been approached by employers about passing a resolution of this type to allow payment of surplus to be made while the scheme is ongoing. If not, it may be worth raising the subject because refunds from ongoing schemes are only permissible where the trustees consider that the payment is in members’ interests (for example because it is being made on condition that the employers agree to an all-round benefit improvement).
Before passing the resolution trustees must give members and the employer at least three months’ written notice. Giving this notice might present a communication challenge if, say, future service benefits have recently been reduced or stopped. The notice must be given to members and the employer by 5 January 2011, so in effect the issue has to be resolved before Christmas. There are no particular requirements as to the form which the written notice must take; it could be combined with another communication to members, perhaps the summary funding statement many schemes will issue in September.
Although s251 is aimed at surplus only in ongoing schemes, its wording is arguably broad enough to catch surplus on winding-up as well. (We are raising this issue with the Department for Work and Pensions in the hope that the legislation can be clarified). We recommend that if a resolution is to be passed, winding-up refunds should be considered too. Where there is only power to pay refunds on winding up, in our view it is sufficiently clear from the context that s251 does not apply; although there may be cases where trustees want to pass a s251 resolution on a precautionary basis.
We recommend that this is an issue to address sooner rather than later. The initial steps to take are as follows:
- Identify whether there was on 5 April 2006 a power to pay a refund of surplus while the scheme is ongoing (remembering that it may have been removed since, or be hidden in a partial termination rule)
- If so, consider whether a s251 resolution would be in members’ interests, and whether the trustees could or should make any changes in the balance of powers in the existing refund provision; also consider whether the resolution should extend to refunds on winding-up
- If not, but there is power to pay refunds on winding-up, consider whether there is any appetite for passing a s251 resolution anyway, out of an abundance of caution, given that the window will close in April 2011.
Schemes which do not allow for any refund of surplus even on winding-up are not affected.