**STOP PRESS** The paragraphs below set out the issue for pension schemes as the legislation currently stands. However, the Department for Work and Pensions has just announced that, given the confusion in this area, it is going to put back the deadline for action to 5th April 2016. On the basis of the DWP announcement, pension schemes could therefore hold off any planned action until late 2015. However, given that action will still be required under current proposals, other schemes may prefer to deal with this now.
What do we need to do?
If you want to take action now, the first stage is to review your scheme’s rules to check if section 251 could apply to the scheme.
If the scheme’s rules do allow a payment to be made to an employer (as will often be the case in respect of, for example, any surplus under the pension scheme), one interpretation of section 251 is that, for trustees then to be able to make such a payment on or after 6th April 2011 (or 2016 as now proposed), they must have passed a resolution before that date stating that the power can still be exercisable.
In terms of funding, the preservation of a surplus refund power can be seen as important as otherwise an employer may become more concerned with funding assumptions/contributions that it believes may lead to future overfunding that will become ‘trapped’ in the scheme. To avoid this issue, trustees can properly agree to maintain a surplus refund power.
Section 251 also allows trustees to specify circumstances and add conditions to any surplus payment power in the resolution they pass. However, in most cases, given the restrictions normally contained in scheme rules as well as in overriding legislation, trustees would not need to seek to use this opportunity to do anything other than maintain the status quo.
Do we need to inform members about this?
Section 251 requires three months’ notice of the proposal to pass such a resolution to be given to the employers and the members of the pension scheme. The notice must be in writing, inform employers/members that the trustees have decided to exercise their power under section 251 to pass such a resolution and specify the date from which the trustees’ proposed exercise of the power is to take effect.
Summary of Action Required to Pass a Resolution under Section 251
- Step 1: Check pension scheme rules – Confirm if there are provisions under the scheme rules which would allow payments to be made to an employer under the scheme and to confirm if section 251 applies.
- Step 2: Trustee formally decides that it intends to pass a resolution – The resolution that the trustees decide to pass can state either that the surplus payment power continues to be exercisable in accordance with the terms of the rules of the pension scheme as they stand, or that the power is exercisable only in such circumstances and subject to such conditions as the trustees may specify.
- Step 3: Notice to employer and members – Under section 251(6), 3 months’ notice of the proposal to exercise the power to pass the resolution must have been given to the employer and to all the members of the scheme. The absolute deadline for this stage is therefore 5th January 2011 (or in 2016 as is now proposed). It may be felt preferable to give the notice at the same time as a more general scheme update to members if timing allows for this.
- Step 4: Pass resolution – The resolution can then be passed on the expiry of three months after the notice was given to the employer and members. This must be on or before 5th April 2011 (or in 2016 as is now proposed).