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Don’t Lose Access to a Pension Scheme Surplus

If your pension scheme contains a power which enables a repayment of a surplus to the employer in certain circumstances, you may need to act soon to retain that power.

Many will recall that section 251 Pensions Act 2004 requires trustees to pass a resolution to enable them to retain an existing power under their scheme’s governing provisions to make a repayment of surplus to their sponsoring employers.

The original legislation was amended so that the deadline for the resolutions was moved to 6 April 2016 (in addition to altering the scope of schemes subject to these requirements by excluding most money purchase arrangements and schemes in wind-up as well as the disapplication to administrative payments to the employer).

This may sound a long way off but trustees and scheme employers should not forget to include employer notice and member consultation requirements (three months) to their timetable – which could mean that decisions need to be taken at the next trustee meeting.

Some schemes will have already considered this before the deadline was moved and perhaps have already completed their process and passed the required resolutions, others may not have a power in their governing provisions and therefore cannot retain the power – this resolution is about retaining an existing power. (Section 251 of the Pensions Act 2004 does provide a power to amend the scheme to insert a new power to repay a surplus to an employer – if any employer and trustees wish to consider this it would be subject to the usual scheme power of amendment, legislative surplus repayment and amendment restrictions, consultation requirements, etc.)

We strongly recommend that trustees and employers do not automatically consider that:

  • their scheme is never likely to ever have a surplus – circumstances can change (and don’t forget that recovery plans are specifically designed to bring up scheme funding levels),
  • there will or should never be circumstances which will result in a refund being repaid to the employer - having a power does not mean the power will necessarily be used, rather an option to do so if considered appropriate;
  • other legislation restrictions will continue to apply before any surplus could be paid such as valuation results demonstrating a surplus at a certain level, members receiving notice before such a payment and notification to the Pensions Regulator;
  • there is an option to add further scheme restrictions to an existing power of repayment of surplus in the resolution retaining the power; and
  • preventing any potential refund of a surplus could have a negative impact on the employer’s willingness to agree a stronger recovery plan to avoid “trapping any future surplus funds in a scheme” and there may be accounting purposes which mean the employer would prefer to retain the power even if it is never used.

As well as statutory deadline, please also be aware that any resolution to retain the power needs to be in place before a new definitive trust deed and rules is adopted to avoid inadvertently losing the power. Trustees and employers of most UK occupational pension schemes will of course be considering, agreeing and adopting new scheme provisions and possibly amalgamating these into new definitive governing documentation to reflect and incorporate all the recent changes in legislation (including flexible benefits, cessation of GMPs, DC benefit refunds, etc). We recommend advice is taken as to what pre-documentation steps need to be taken (such as a section 251 resolution), in addition to which legislative-related changes are required to be reflected in the scheme provisions.

We would recommend that Section 251 Surplus Power is put back on the agenda for trustees and employers and if further assistance is required – such as checking the scheme provisions to ascertain whether a power exists and can be retained, drafting of consultation material or resolutions - please contact any member of the Irwin Mitchell Pension Team who would be happy to assist.

Key Contact

Lucy Herbert