Whilst surplus may not be uppermost in most schemes' consideration at the moment, payment of surplus to employers from defined benefit schemes is an issue that has recently been considered by the Department of Work and Pensions (DWP) amidst apparent concern in the industry over the existing rules. At the beginning of October, the DWP completed an informal process whereby they issued a discussion paper to "selected key stakeholders" seeking views on options for amending the legislation governing surplus. The DWP stressed in their correspondence, however, that the process being undertaken (which was a follow up to an earlier consultation) was not a formal public consultation.

Since 6 April 2006, payment of surplus to an employer is prohibited unless the scheme is funded to a full buy-out level and the trustees are satisfied that a payment is in the interests of the scheme's members. It is also a requirement that the scheme rules must allow payments to be made to the employer from the scheme’s funds. Options set out in the DWP discussion paper that are of particular interest include whether it would be helpful to clarify the members' interest requirement, whether consideration should be given to lowering the full buy-out threshold (and taking this point further, whether the threshold should only be lowered in schemes which are open to new members as an incentive to employers to keep their schemes open). The discussion paper concluded with a general invitation welcoming any other suggestions that those being consulted may wish to make.

We shall keep you updated if there are any further developments in this area. In the meantime, however, trustees and sponsoring employers should be aware of the impact of particular provisions of the Pensions Act 2004, which have implications for payment of surplus to sponsoring employers. These provisions mean that it will only be permissible for a payment of surplus within an occupational pension scheme to be made to a sponsoring employer (even if the power already exists in the scheme rules) where the trustees have made a resolution effectively re-activating the power.

Crucially, this is not something that schemes can ignore until such time as they may wish to use the power, as any resolution must be made before 6 April 2011. If the trustees of a scheme do not resolve to reactivate by 6 April 2011, a discretion under the rules to make payments of surplus to the employer will be lost. Trustees and sponsoring employers should consider this issue now and, having taken advice, decide whether to resolve to "re-activate" any such power under their scheme rules.