Preserving powers to refund surplus

Introduction

Prior to the FA04, exempt approved occupational pension schemes were required to keep any actuarial surplus within certain parameters. One of the ways in which surplus could be reduced was via a payment to the employer (taxable at 35%).

The actuarial surplus requirements were removed on A-Day (6 April 2006) and, as a result, the power in the Pensions Act 1995 to permit such payments 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.

In this Alert:

• Key points
• Transitional provisions
• The Resolution
• Trustee considerations
• Taking action?

Key points

• Scheme rules commonly include a power to return surplus to an employer on an ongoing basis as well as on winding-up (subject to the payment of tax).
• However, transitional provisions under the PA04 appear to prevent a payment being made to an employer out of scheme assets unless an appropriate trustee resolution has been passed.
• The statutory power to pass such a resolution can be exercised only once and, in any event, before 6 April 2011.
• The exact scope of the transitional provisions is somewhat unclear so we are seeking to clarify this with the DWP.

Transitional provisions

The transitional provisions under the PA04 are broadly drafted and appear to prevent a payment being made to an employer out of scheme assets unless an appropriate trustee resolution has been passed. Therefore trustees should consider passing a resolution to cover, for example, a power to return surplus on either an ongoing basis or on wind-up.

Trustees have until 6 April 2011 to decide whether to preserve or revise their power to make payments to the employer. If no decision is made before then it would appear that any such power under the scheme rules effectively disappears.

The Resolution

Before 6 April 2011, trustees need to pass a resolution which either:

• confirms that their power to return surplus will remain exercisable in its current form; or
• specifies the circumstances in which it may be exercised.

Schemes without a power to return surplus cannot use these provisions to introduce such a power.

Trustee considerations

Prior to passing any resolution, trustees must:

• be satisfied that it is in the interests of scheme members that the power is exercised in the manner proposed; and
• give at least 3 months’ notice of their proposal to both the employer, as well as to the scheme members.

Trustees may only exercise the statutory power to pass such a resolution once.

Taking action?

While surplus is probably the last thing on most trustees’ minds at the moment, it may well become an issue for schemes in the future. Trustees may wish to act to preserve their power to return excess funds to the employer as employers are likely to be more cautious about funding the scheme if this could result in any surplus becoming “trapped”.

However, as many scheme members have recently been subject to cost-saving benefit changes, trustees may be concerned about writing to them to explain a decision to allow future surplus repayments.

The transitional period ends on 6 April 2011. Bearing in mind the 3 month notice period, trustees only have a limited window remaining in which to make their decision.