When winding up an occupational (defined benefit) pension scheme, once all liabilities in respect of its members have been discharged, any remaining surplus can be repaid to the scheme’s employer provided that the scheme’s trust deed and rules contain the relevant provision. If such a provision does not exist, the trustees may apply to the Pensions Regulator (“tPR”) to authorise amendments to the scheme’s rules in order to effect the repayment. The Pensions Regulator acquired the power to make any such amendments under section 69 of the Pensions Act 1995 (the “PA 1995”), but may do so only “after the liabilities of the scheme have been fully discharged” (section 69(3) (b)).

The division within tPR which exercises such “reserved regulatory functions” is known as the Determinations Panel. This panel recently refused to amend the Wright Health Group Limited Superannuation & Life Assurance Scheme’s (the “Scheme”) trust deed and rules to make a provision for the repayment of surplus to the employer.

Details

The Scheme commenced winding up on 7 January 2011 and, having accepted a buyout quotation to secure the members’ benefits in full, the trustees still found the Scheme to be in surplus of £540,000. The trustee wished to allocate the surplus using the average ratio of contributions over the life of the Scheme (1 third by the members: 2 thirds by the employer). The sum apportioned to the employer would be used to meet the contribution costs of the employer’s new defined contribution scheme.

However, not only did the Scheme’s trust deed and rules not contain a provision allowing the refund of surplus to the employer, but rule 18(c) of the Scheme’s trust deed and rules explicitly forbade any amendment of the scheme to make a repayment of surplus to the employer.

Consequently, the trustee applied to tPR to amend the Scheme and tPR’s case team gave their support to the application. Conversely however, the Determinations Panel requested further information from the trustee regarding the wind up of the Scheme. The principal questions asked by the Determinations Panel included a request for information on the additional benefits and risks to the members of the Scheme if the order were to be made, and whether all liabilities of the Scheme had been discharged.

Although the results of the Determinations Panel’s investigation proved that the buyout covered and secured the members’ benefits in full (with many even in excess of their entitlement under the Scheme’s rules) and that there was no perceived risk that members would not get their full scheme entitlement, the Determinations Panel decided that no amendments to the Scheme’s trust deed and rules could be made. Their reasons for doing so were threefold:

  1. Section 69(3) (b) of the PA 1995 requires the Scheme’s liabilities to be fully discharged in order for tPR to amend the Scheme’s trust deed and rules. Rule 19(iii) of the Scheme’s trust deed and rules required any surplus after member’s benefits had been fully secured to be used to further increase these benefits “in such a manner as the Trustee may decide.” Accordingly, based on the evidence submitted by the trustee, tPR did not consider that the Scheme’s liabilities had been fully discharged in this respect.
  2. The tPR declared the word “liability” (relating to its use in section 69(3) (b) of the PA 1995) to mean that the trustee was under an obligation at law. Therefore, given that rule 19(iii) imposed an obligation enforceable in court, this constituted a liability and as a result, the surplus must be distributed among the members and others mentioned in the rule.
  3. TPR did not consider it had received sufficient information from the trustee regarding the assets and liabilities of the Scheme and the complexity of alternative means of achieving a refund to the employer. Accordingly, it could not amend the Scheme’s trust deed and rules to this effect.

Comment

The case is a rare explanation of the Determination Panel’s application of their power under section 69. While most schemes’ funding position will mean a return of surplus is currently an unlikely prospect, the determination is noteworthy in term of the Panel’s strict application of the argumentation rule and interpretation of “liability.” Even where member benefits were secured in full as part of a buyout, the rules placed an obligation on the trustees to apply the surplus only in accordance with the augmentation rule.