Why is action needed?
A hitherto obscure provision in the Pensions Act 2004 (section 251) means that surplus held in a pension scheme cannot be repaid to an employer unless the trustees have made a resolution under that section. Most importantly, such resolution must be passed before 6 April 2011. After that date, the power to pay surplus from the scheme to an employer may be lost. Three months’ notice of such a resolution needs to be given to members – therefore the deadline for action is effectively 5 January 2011.
Are surpluses still relevant?
Although many schemes are in deficit at the moment, it is impossible to predict funding levels in the future. Schemes were in surplus less than 15 years ago and the longevity of pension liabilities means that schemes could return to surplus in future years. Lack of a power to repay surplus could leave assets locked in a pension scheme.
More immediate reasons for retaining the power
The employer bears the main risk of funding. Trustees are keen for the employer to fund the pension scheme to as high a level as possible in order to maintain the security of members’ pensions. The employer might be discouraged from funding the scheme to a high level (even if it can) when there is no ability to reclaim surplus once pensions are fully funded.
There is also an accounting reason. Under International Accounting Standards (IAS19), a power to repay surplus (even where repayment is not envisaged) may have a significant effect on the reporting of pension assets in the sponsoring employer’s balance sheet. If no repayment is allowed, the asset that can be shown on the balance sheet may be limited, even where the scheme is over 100% funded on the IAS19 basis.
Which schemes are affected?
Section 251 applies to any scheme that, as at 5 April 2006:
• contained a power to make payments from scheme funds to the employer;
• was subject to Inland Revenue limits on the amount of surplus that could be held in the scheme (in general, the limits applied to all tax exempt approved schemes; and
• at that date was not winding up.
What about schemes where a power to repay surplus was added after 5 April 2006?
For example, no power may have existed at 5 April 2006, but a power may have been added during a consolidation of the trust deed and rules after A Day. On the face of it, section 251 does not apply to such schemes. However, for the avoidance of doubt, we would recommend that trustees still consider taking action as below to retain the power to repay surplus.
What about schemes that commenced winding-up after 5 April 2006?
On the face of it, section 251 applies since these schemes were not winding up on 5 April 2006. Again, for the avoidance of doubt, we would recommend that trustees still consider taking action as below to preserve the power to repay surplus.
Action by the trustees now
1. Undertake legal review of the scheme rules to check whether they contain a power to repay surplus and whether section 251 applies.
2. Consider whether to pass a resolution retaining power to repay surplus.
Notes:
• The trustees must be satisfied that the resolution is in the interests of the members.
• A resolution under section 251 is not a decision to repay surplus – it just enables a decision to repay surplus to be made at a later date.
• The trustees may specify circumstances and conditions which must be met before a power to refund surplus may be exercised.
• Any decision to repay surplus must be made by the trustees regardless of what is said in the scheme rules. A refund may only be made if the scheme is fully funded on the buy-out basis.
3. Before exercising their power to make a resolution under section 251, trustees must give three months’ written notice to the employer and the members. The requirement is merely to notify members, not to ask for their views as part of a consultation exercise. This means the last date for giving notice is 5 January 2011.
How Pitmans can help
Pitmans can carry out the necessary legal review and draft a suitable notice (for issue by 5 January 2011) and resolution (for passing before 5 April 2011). We can also advise trustees on whether it is reasonable and appropriate for them to act under section 251.
David Hosford
Partner
T: + 44 (0) 118 957 0363
E: dhosford@pitmans.com
Symon Rowley
Director
T: + 44 (0) 118 957 0301
E: srowley@pitmans.com
Rosamund Lee
Solicitor
T: + 44 (0) 118 957 0261
E: rlee@pitmans.com
Leave a Reply