In 2010, many employers and trustees woke up to the fact that a little known section of the Pensions Act 2004, which had been in force since April 2006, might upset the way their scheme was funded in future. Section 251 caused plenty of discussion at trustee meetings last year. Fortunately, the Pensions Bill 2011, issued on 13 January, addresses the problem.

New requirements for return of surplus assets

Many scheme rules in place on 6 April 2006 contain a trustee power permitting surplus assets to be returned to the employer whilst the scheme is ongoing, but only if the statutory requirements are met. This gives employers the comfort of knowing that if they agree to the trustees’ prudent funding assumptions and a surplus is generated in the scheme in the future, the employer may be able to gain access to those surplus assets long before the scheme is wound up.

Unfortunately, Section 251 altered the status quo. In order for trustees to preserve the return of surplus assets power, they need to comply with Section 251. This requires the trustees to pass a resolution agreeing to retain the power in the rules. Before passing the resolution, members need to be issued with three month’s written notice of the trustees’ intention.

Problems with the drafting

Unfortunately, due to problems with the drafting of Section 251, the provision was wide enough to prevent all payments back to the employer whilst the scheme was ongoing, not just the return of surplus assets, eg where an employer pays for scheme expenses on behalf of the trustees which should have been met from scheme’s assets, the employer may be reimbursed by the trustees for those payments. This is a permitted payment under the Finance Act 2004. However, from 6 April 2011, Section 251 prevented this, unless three months’ notice to members was given and the trustee resolution passed by 5 April 2011.

To make matters worse, some trustees were being advised by their pension lawyers that Section 251 was even wide enough to capture refunds of surpluses on winding up, although this was not a view shared by the RPC pensions team. All the confusion made the drafting of member notices unduly complex and worrying for members (particularly when most schemes have a deficit).

Problem solved – for now

The Pensions Bill, once enacted, will extend the deadline for passing a trustee resolution by five years until 5 April 2016. It will also amend the provisions in Section 251 to make it clear that they only apply to a scheme which is ongoing, and only then to the return of surplus assets to the employer under Section 37 of the Pensions Act 1995. Section 251 will not apply to other payments, such as ‘scheme administration employer payments’. This should make the notices to members and trustee resolutions easier to draft. But don’t wait five years to comply!

Technical information

To access the Pensions Bill 2011 go to: http://www.publications.