Preserving powers to refund surplus: DWP clarification

Introduction

Section 251 of the PA04 has been troubling both trustees and employers. It appears to prevent a payment being made to an employer out of scheme assets unless, before 6 April 2011, an appropriate trustee resolution has been passed. The DWP has recently issued a statement acknowledging the uncertainty about the scope and application of the section, and explaining the action it intends to take.

In this Alert:

• Key points
• Background
• The DWP’s statement
• Can we rely on this?
• What should trustees do?

Key points

• The DWP intends to amend section 251 “when a suitable opportunity arises” to ensure it operates in a “sensible and proportionate way”.
• Section 251 will be clarified so that it will only apply to schemes with a power to return surplus on an ongoing basis.
• The DWP proposes to extend the deadline for trustees to take action by 5 years, to 6 April 2016.

Background

Prior to the FA04, exempt approved occupational pension schemes were required to keep any actuarial surplus within certain parameters or suffer adverse tax consequences. One of the ways in which surplus could be reduced was via a payment to the employer.

The actuarial surplus requirements were removed on A-Day (6 April 2006) and, as a result, the power in section 37 of the PA95 to permit such payments to employers was revised to remove the reference to the previous tax legislation. Since A-Day, a return of surplus can be made to an employer from an ongoing scheme only if:

• the scheme rules permit such a payment;
• the power is exercised by the trustees; and
• certain prescribed conditions are satisfied.

Section 251 was introduced specifically to take account of the above changes. It provides trustees with a transitional power to preserve their current power(s) to return surplus and/or to amend such powers by passing a resolution before 6 April 2011 (having first issued a notice to members and employers).1

As section 251 is broadly drafted, it potentially applies to a wide range of payments to employers, for example, reimbursement of employer expenses in an ongoing scheme.

The DWP’s statement

Following representations from many in the industry (including Sackers), the DWP has written to those who contacted the department to explain that it intends “to amend [section 251] when a suitable opportunity arises, in order to ensure that it operates in a sensible and proportionate way”. In particular, it will make clear that the provision only applies to payments which are covered by section 37 of the PA95 (essentially a payment of surplus to an employer from an ongoing scheme). The DWP also proposes to extend the deadline for action by trustees by 5 years, to 6 April 2016.

Can we rely on this?

We believe that it is reasonable for trustees to rely on this statement. However, they should be aware that there is a risk that the DWP will not take action before the power to pass a resolution under section 251 (as currently drafted) lapses in April 2011. Likewise, this concession could depend upon the Coalition Government remaining in power!

What should trustees do?

Schemes will generally fall into two camps; those currently with a section 37 power (Type A) and those without (Type B).

Type A schemes

Type A schemes will be caught by even a modified section 251. As such, if they have already notified their employer and members of their intention to pass a resolution there is no reason not to continue the process to its conclusion. Those who are still on the starting blocks have a choice:

• press ahead with a notice if there is a ready-made vehicle for it (for example, an annual popular report); or
• wait until the legislation is published and take advantage of the extension to the deadline.

As the scheme employer stands to lose out if the requirements of section 251 are not met, its view should probably be sought here.

Type B schemes

Type B schemes should no longer need to pass a section 251 trustee resolution. However, with no amending legislation currently in sight and the time for issuing the notice fast running out, some trustees (and some employers in particular) may wish to err on the side of caution by proceeding with the section 251 notice.

As the appropriate course of action therefore depends on the scheme’s specific situation, trustees should discuss the latest developments with their advisers as soon as possible.

1 For more information, see our Alert: “Preserving powers to refund surplus” dated 24 May 2010